Pimco's Bill Gross says sayonara bond buyers, you're dead

After pumping bonds like a weightlifter pumps weights, Pimco's Bill Gross is now saying bonds is overinvested and their best days are over. Time to move back to stocks.


March 26 (Bloomberg) -- Bill Gross’s warning that the almost three-decade rally in fixed-income has run its course may catch individual investors off guard after they poured $89 billion into bond funds this year.
The inflows through yesterday are running almost five times higher than deposits during the first three months of 2009, according to Brad Durham, co-founder of Emerging Portfolio Fund Research Inc., a Boston-based firm that tracks investor flows worldwide into mutual funds and exchange-traded funds. Investors reeling from losses during the financial crisis poured record amounts into fixed-income funds last year, missing the biggest stock market rally since the 1930s.
“The continued inflows make you scratch your head,” Miriam Sjoblom, a bond fund analyst at Chicago-based research firm Morningstar Inc. said in an interview. “We’ve seen time and again investors make these kinds of tactical decisions at the wrong time.”
Pacific Investment Management Co.’s Gross, manager of the world’s biggest bond fund, said yesterday in an interview with Tom Keene on Bloomberg Radio that “bonds have seen their best days.” Pimco, which announced in December that it would offer stock funds, is advising investors to buy the debt of countries such as Germany and Canada that have low deficits and higher- yielding corporate securities.
The prospect of a strengthening U.S. economy and rising interest rates makes an “argument to not own as many” bonds, Gross said in the interview.
Pimco’s Rise
Investors, spooked by the 38 percent plunge by the Standard & Poor’s 500 Index in 2008, weren’t lured back to equities by the market’s 74 percent rebound from its 12-year low in March 2009. Bond mutual funds in the U.S. attracted $409.4 billion over the past 14 months, according to Morningstar. Stock funds gathered $11.7 billion during the same period.
The surge into bonds made Gross’s Pimco Total Return Fund the largest mutual fund in history with $214.3 billion as of Feb. 26. Three of the industry’s top-selling mutual funds this year invest in bonds, with Gross’s fund topping the list, Morningstar’s data show.
Part of the reason that investors have been putting money into bonds is to reach for higher returns as money-market funds are yielding close to zero, Bill Eigen, manager of the $8 billion JPMorgan Strategic Income Opportunities Fund, said in an interview from New York yesterday. Rates will start to go up over the next two years, exposing investors in longer-duration bond funds to losses, he said.
30-Year Rally
Treasuries have rallied for almost three decades, pushing the yield on the 10-year Treasury note from a high of 15.8 percent in September 1981 to 3.89 percent as of yesterday. The yield reached a record low of 2.03 percent in December 2008 during the height of the credit crunch.
Excess borrowing in nations including the U.S., U.K. and Japan will eventually lead to inflation as governments sell record amounts of debt to finance surging deficits, Gross said.
“People have been making money on fixed income for so long, people assume it’s going to continue when mathematically, it cannot,” said Eigen, whose fund is the third-best selling bond fund this year, according to Morningstar.
“When people finally start to lose money in fixed-income, they won’t hesitate to pull money out very soon,” he said.
John Hancock Funds President and Chief Executive Officer Keith Hartstein said retail investors are already late in reversing their rush into bond funds, repeating the perennial mistake of looking to past performance to make current allocation decisions.
‘Rear-View Mirror’
“You can almost guarantee what this year’s top-selling mutual funds categories will be looking back to last year’s top performers,” he said. “It’s a great source of frustration trying to get people to stop looking in the rear-view mirror and to start looking forward.”
Hancock is telling clients that bond funds very rarely outperform equities over a decade, as they did in the 10 years ending in March 2009. In the following 12-month periods, they have never repeated the feat, he said.
He said Hancock’s most recent flow data indicate investors are just beginning to shift course.
“You have to look closely to see it, but the bond flows are down a little and equity fund flows were positive over the last few weeks,” he said. “We could be in the midst of that sea change.”
Gross, who co-founded Newport Beach, California-based Pimco, shares the title of chief investment officer with Mohamed El-Erian. The Total Return Fund advanced 16 percent in the past year, beating 54 percent of its peers, according to data compiled by Bloomberg. As of December, Pimco, a unit of Munich- based insurer Allianz SE, managed $1 trillion in assets.