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A number of big bond funds are building up cash and short-term assets in view of the uncertainties in the world of interest rates and government finance. This report covers several of my favorite bond fund managers and what they are doing now [emphasis added]:

Mutual funds in the U.S. that focus on bonds have the highest percentage of their assets in cash since 2008, which may temper a rise in yields from about record lows as managers put that money to work.

Managers are sitting on about $243 billion of cash and short-term securities, or about 9.79 percent of assets, after investors plowed $90 billion into taxable bond funds this year, according to Morningstar Inc. and the Investment Company Institute in Washington. That’s up from 9.1 percent last year and above the average of 8.43 percent in the decade ended 2010.

The increase from cash levels of 8.43% to 9.79% does not necessarily sound huge, but it represents a lot of cash and it is a sign that the managers are uncertain about the future of interest rates. Bloomberg continues:

“We are looking for a more severe down move in prices, for a better level to buy,” said Jeffrey Gundlach, whose $8.51 billion DoubleLine Total Return Bond Fund beat 99 percent of its peers in the last year by returning 13 percent, according to data compiled by Bloomberg. “To hold cash you have to have a conviction that prices of something that you’d otherwise own will go down, which is exactly what happened in June.”

…Gundlach, the chief executive officer of Los Angeles-based DoubleLine Capital Inc., said in a telephone interview that he has 10 percent of the fund’s assets in cash, about five times what it usually holds. He views a move in the 10-year Treasury yield above 3.5 percent as a buying opportunity.

In addition to Jeffrey Gundlach, the bond fund managers raising cash include Western Asset and Pimco. The Western Asset Core Plus Bond Fund (WACPX) has been the most opportunistic of the funds mentioned, with a cash position north of 30%. The piece continues:

…The $8.7 billion Western Asset Core Plus Bond Fund had 33 percent of its assets in cash as of June 30, data from Morningstar show. The fund, managed by Legg Mason Inc.’s Western Asset Management unit, has advanced 7.7 percent to beat 89 percent of peers over the past five years, according to data compiled by Bloomberg.

…Bill Gross, Pimco’s co-chief investment officer and manager of the $242.8 billion Total Return Fund, has said Treasuries are unattractive because yields are too low relative to the risk of faster inflation.

The Total Return Fund had approximately 29 percent of its assets invested in cash and equivalents as of June 30, equivalent to about $70 billion. While Gross boosted the fund’s investment in U.S. government securities to 8 percent of assets in June from 5 percent in May, he told CNBC on July 13 that their Treasury investment is in two-year and three-year notes…

I think it is safe to say that these bond funds and their respective managers are concerned about the trend of interest rates as well as the debt debacle underway in Washington DC. As always though, confusion and chaos can lead to opportunity and these bond funds want to have some assets available to deploy if opportunity arises. This is one of the chief virtues of actively-managed mutual funds.

Hat tip: Rita Lee

Disclosure: Kurt Brouwer owns shares in DoubleLine Total Return (DBLTX) and Pimco Total Return (PTTRX)

Source: Big Bond Funds Banking Cash