Tags: Bond | Treasury | Pimco | JPMorgan

Bond Exodus at Broad Funds Hits Pimco, JPMorgan

Tuesday, 12 November 2013 10:55 AM

In a year of record withdrawals from taxable bond funds, no category has been harder hit than the biggest broad market strategies managed by firms from Pacific Investment Management Co. to JPMorgan Chase & Co.

Investors yanked $61.8 billion from intermediate-maturity debt funds in the first nine months of the year, while pouring $46.2 billion into bonds maturing in less than three years, according to data compiled by Morningstar Inc.

Buyers are showing a preference for shorter-maturity and high-yield bonds that are less sensitive to rising benchmark borrowing costs as the Federal Reserve weighs curtailing the pace of its unprecedented stimulus that’s bolstered credit markets.

Concern is mounting that a general basket of bonds won’t preserve income and generate returns for investors who reaped average annual gains of 6.3 percent from the start of 2009 through last year. As the central bank prepares to start slowing its bond buying, the Bank of America Merrill Lynch U.S. Broad Market Index is on pace for its first annual decline since 1999.

“People aren’t getting enough income from their bond portfolios as they need,” Michael Rawson, a fund analyst at Morningstar in Chicago, said in a telephone interview. “You’re going to see money come out of intermediate bond funds and into these more income producing bond categories.”

Pimco, JPMorgan

Investors withdrew $28.1 billion from Pimco’s $247.9 billion Total Return Fund in the first nine months of the year, the most among all intermediate bond strategies, Morningstar data show. JPMorgan’s $24.6 billion Core Bond Fund had the third biggest outflow with $4.6 billion of redemptions, while American Funds’ $28.2 billion Bond Fund of America reported $4.8 billion of withdrawals.

In the same period, non-traditional bond funds that give managers more flexibility in how they invest received $45 billion of deposits, Morningstar data show.

“While core bond categories have experienced outflows industry-wide, we have continued to see inflows into our absolute return and unconstrained strategies,” Mark Porterfield, a spokesman for Newport Beach, California-based Pimco, said in an e-mailed statement.

JPMorgan’s Core Bond Fund, which was started on Dec. 31, 1983, and focuses on investment-grade notes with medium-term maturities, reported a $2.3 billion withdrawal on Oct. 28, spurring the biggest weekly outflow from U.S. investment-grade debt funds since June, according to data compiled by Bloomberg.

High Yield

While there have been some withdrawals from JPMorgan’s core bond strategies, “most of the outflows have come from clients aiming to diversify their fixed-income portfolios,” with many of the same clients depositing money into flexible debt funds, Gregory Roth, a spokesman for the New York-based firm, said in an e-mailed statement.

The withdrawal last month reflected a client moving assets from the Core Bond fund into a different vehicle managed by the firm and not a rotation of money out of investment-grade debt, Roth said.

Buyers pulled $2.2 billion from broader bond strategies in the U.S. during the week ended Oct. 30, the biggest outflow in more than three years, data compiled by Royal Bank of Scotland Group Plc show. Funds focused on high-yield bonds reported $752.7 million of deposits in the period.

Speculative-grade debt, rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s, is less sensitive to rising interest rates because of the bigger premium it pays over benchmarks.

Notes Underperform

Pimco’s Total Return Fund, started in 1987 and managed by Bill Gross, has shrunk by an estimated $37.5 billion since the start of this year, ending October with about $248 billion in assets, according to data provided by Pimco and compiled by Bloomberg. It ceded its title as the world’s largest mutual fund to Vanguard Total Stock Market Index Fund, which ended October with $251 billion.

Medium-term notes are poised to under-perform shorter-term ones for the first year since 2008, when the Fed embarked on an unprecedented quantitative easing program to jump start the world’s biggest economy from the depths of the financial crisis.

Corporate bonds maturing in five to seven years have declined 0.01 percent this year compared with a 1.6 percent gain for notes maturing in one to three years, Bank of America Merrill Lynch index data show.

Treasury Yields

The Bank of America Merrill Lynch U.S. Broad Market Index has lost 2.01 percent this year after posting a 2.45 percent decline in the three months ended June 30, its biggest quarterly loss since the start of 1994. The index gained 4.53 percent in 2012.

Fed Chairman Ben S. Bernanke rattled fixed-income markets in May by telling Congress that the central bank may reduce the pace of its $85 billion of monthly purchases of Treasurys and mortgage bonds if the economy showed sustained improvement.

Yields on 10-year Treasurys rose as high as 3.01 percent on Sept. 6, up from 1.76 percent at the end of December, as speculation mounted that the Fed would change the pace of its bond buying at its September meeting.

While policy makers surprised forecasters by maintaining the level of stimulus, yields reached a seven-week high of 2.75 percent at the end of last week as reports showed the economy expanded in the third quarter beyond projections and added more jobs in October than forecast.

‘Overriding Factor’

“We’re in an environment where the likelihood is that interest rates are going to move higher and that hasn’t been the case for 30 years,” Gregory Kamford, a credit analyst at RBS in Stamford, Connecticut, said in a telephone interview.

Since the end of May, investors have removed $14 billion from U.S. intermediate-maturity corporate bond funds while putting $11.6 billion into funds focused on one-to-three year corporates and $12.9 billion into notes due in more than 10 years, RBS data show.  

“The only logic to follow at the moment is whether the central banks continue to supply the capital market with more liquidity,” Arthur Tetyevsky, a credit strategist at Imperial Capital LLC, said in a telephone interview. “That seems to be the overriding factor.”

Elsewhere in credit markets, the cost to protect against losses on corporate bonds in Europe fell to the lowest since April 2010. Moody’s lowered its forecast for the global default rate among speculative-grade companies at year-end after the measure was unchanged last month.

European iTraxx

The Markit iTraxx Europe Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on the creditworthiness of 125 companies with investment-grade ratings, fell 1.1 basis points to 81.4 basis points.

Bond markets were closed in the U.S. for the Veterans Day holiday. In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan dropped 1 to 137 as of 8:18 a.m. in Singapore, Australia & New Zealand Banking Group Ltd. prices show.

The swaps index typically declines as investor confidence improves and rises as it deteriorates. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The trailing 12-month default rate for speculative-grade companies globally was 2.8 percent in October, unchanged from the previous month and down from 3.2 percent a year earlier, Moody’s said in a report.

The credit grader is forecasting the rate to end 2013 at 2.8 percent, compared with a 3 percent year-end rate it estimated in a report last month. The measure will decline to 2.4 percent by October 2014, Moody’s said.

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In a year of record withdrawals from taxable bond funds, no category has been harder hit than the biggest broad market strategies managed by firms from Pacific Investment Management Co. to JPMorgan Chase & Co.
Tuesday, 12 November 2013 10:55 AM
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