NEW YORK (Reuters) – The massive rally in Treasuries has whipsawed the biggest name in the bond world.
Pimco group chief investment officer Dan Ivascyn’s Pimco Income Fund, the largest actively managed bond fund with assets of more than $130 billion, is lagging 93 percent of its category so far this year, according to Morningstar data as of Saturday.
Several macro trades have hurt the fund’s performance so far this year: its underweight position in Treasuries and corporate credit risk and its heavy exposure to mortgages.
Some $8.4 trillion in mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae have been rocked by the swift decline in bond yields on worries that a wave of mortgage refinancing would erode the value of these bonds.
When interest rates fall and homeowners refinance, investors of mortgage-backed securities get back their principal, which they have to reinvest at lower rates. To offset the resulting shortening of their portfolios, they buy noncallable Treasuries. In bond-market parlance, this is called the “convexity trade.”
The Pimco Income Fund is up 4.68 percent year-to-date, lagging its multi-sector bond category by 3.21 percentage points, Morningstar data show. Moreover, the fund is lagging the Bloomberg Barclays U.S. Universal Total Return Index by 4.24 percentage points for the same period, according to Morningstar.
“The primary focus of the Income fund is a sustainable dividend and long-term performance, especially in the more credit sensitive portion of portfolio, so we are willing to be patient in the near-term if we believe that long-term we can protect against permanent capital loss,” Ivascyn said in emailed comments to Reuters.
Pimco Income has a more flexible mandate of producing a high, consistent return and long-term capital appreciation rather than a benchmark-focused total return strategy of more traditional bond funds. The fund’s three-year and five-year annualized returns were 5.43% and 5%, respectively, Morningstar data showed as of Aug. 16. On a 10-year annualized basis, the fund has posted returns of 9.25%, easily surpassing all of its competitors in the category, Morningstar data show.
Corporate credit spreads have been volatile. During the fourth quarter of 2018 when stocks plunged and people feared much higher defaults, corporate credit widened dramatically relative to mortgages. Early this year when investors’ views began to improve and central banks became more accommodative, corporate credit spreads tightened significantly as stocks soared.
But while agency MBS has not performed well lately, Ivascyn called housing-related investments “more resilient” than corporate credit.
“We believe that corporate credit is fundamentally weak and could overshoot to the downside if the economy deteriorates,” he said. “We also think developed government bond yields are too low and could easily reverse so we are comfortable with low rate exposure.”
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