WSJ.com is available in the following editions and languages:
Thank you for registering.
We sent an email to:
Please click on the link inside the email to complete your registration
Please register to gain free access to WSJ tools.
An account already exists for the email address entered.
Forgot your username or password?
This service is temporary unavailable due to system maintenance. Please try again later.
The username entered is already associated with another account. Please enter a different username
The email address you have entered is already in use.Please re-enter the email address.
Send me information about more WSJ features
Create a profile for me in the Journal Community
Why Register?
Privacy Policy | Terms & Conditions
As a registered user of The Wall Street Journal Online, you will be able to:
Setup and manage your portfolio
Personalize your own news page
Receive and manage newsletters
Receive and manage newsletters
Remember me Forgot your password?
Digg
Has Pimco‘s success during the past three decades mostly been down to luck?
The question is worth asking because the giant bond-management firm, owned by Allianz and with more than $1 trillion of assets under management, including equities, seems to be hitting some rough times.
Pimco’s flagship product, the $244 billion Total Return Fund, the world’s biggest bond fund, suffered a full-year outflow for the first time since it was established in 1987, losing $5 billion during the year and $1.4 billion in December alone, according to a Wall Street Journal report.
The fund has routinely beaten its benchmark and tended to be an industry top performer. But it, as with bond funds more generally, has also benefited from a 30-year bull market, during which U.S. 10-year Treasury-bond yields dropped from a little under 16% to less than 2% now.
Now it’s worth remembering that Bill Gross founded the firm in 1971 and managed to thrive in a decade during which inflation was a bond killer. But it’s also worth remembering that he started with $12 million, an easier amount to juggle when dealing with the vagaries of market volatility.
And that’s the problem. Not only has he got a much bigger fund to maneuver–it’s like going from a performance dinghy to a supertanker–but Mr. Gross has to continually weigh the possibility that the market is facing a secular turning point.
When the 30-year bull market for bonds ends, it could well stumble into a multi-year, possibly multi-decade bear market. Common sense suggests that at these yields, bonds don’t have too much further to climb.
Yes, the Federal Reserve continues to keep downward pressure on yields through its commitment to long-term zero interest rates. But at some time the U.S. economy will recover to the point at which it is running at capacity. And then the huge volume of liquidity and the Fed’s vastly engorged balance sheet will trigger very serious inflation and, therefore, heavy bond-market losses.
Mr. Gross has been alert to this risk and last year made a jump out of Treasury bonds. This proved to be a big mistake when the risk of a euro-zone meltdown and a U.S. double dip sent investors stampeding back to the safest sovereign debt markets they could find, with T-bonds at the top of the list.
In his latest note, Mr. Gross acknowledges that the risks faced by bond investors lie at two extremes. Either central banks succeed with their massive volumes of stimulus and trigger a very significant dose of inflation, which would be the kiss of death for sovereign bonds and the dollar. Or they fail in the way that Japan failed, with the result that developed economies continue to struggle through many years of low inflation or outright deflation as households and financial firms continue to rebuild their balance sheets, in which case there might even be some more upside to Treasury bonds.
Whatever happens, the favorable wind that blew substantial annual returns to bond investors–in the region of 6%-plus for many years–seems to have blown itself out. From here on in, the returns are likely to be modest at best. Or they might transmogrify into very ugly losses. Even for the best and smartest bond investors, like Pimco’s Mr. Gross.
MySpace
Digg
del.icio.us
StumbleUpon
Error message
The investment media has been calling for an end to the bull market in bonds for a long time. Last year the Bespoke financial blogger roundtable was unanimous about one thing before one of the best years for long bonds:
http://stockmarketadvantage.com/bespoke-roundtable-members-give-guesses-for-2011/
The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
Read Full Article »