At the end of July, PIMCO's Total Return Bond Fund had 33% of its portfolio invested in US Treasures. However, at the end of August, the number had dropped to 21%. Why did Bill Gross sell off his treasuries? I think the answer lies in a tweet which he made on August 24, 2012:
Even with QE3, Treasury yields have practical limits. 1.50% 10 year is a good common sense bottom.
The 10 year Treasury at the time was trading at 1.68%, very similar to the current yields on treasuries. Bill Gross is essentially calling current levels for treasury yields a market bottom. Some commentators have called Bill Gross "gutsy" for making this call, because he was wrong the last time he made a similar bearish treasury call. As a result his fund underperformed in 2011.
Municipal Holdings Are Growing In The PIMCO Total Return Fund and Are Major Focus of The Bond ETF
The natural question is where is Bill Gross putting the money that he has taken out of Treasuries? The PIMCO Total Return Fund (mutual fund) has slowly been increasing its holdings in municipal bonds. Municipal bonds currently make up 5% of the PIMCO Total Return Fund's assets. However, the ETF version of the mutual fund, which is both smaller and nimbler than its parent, has 9% of its assets in municipal bonds. As its harder to build up a large position in municipal bonds than treasuries or MBS without moving prices (the typical municipal bond issue is much smaller and trades less frequently), it's very logical that the ETF would be able to deploy a greater percentage of its assets to municipals. (This is one reason Learn Bonds favors the ETF over Pimco Total Return Fund.)
The Assets Under Estimate The Size Of Bill Gross' Muni Bet
While municipal bonds are 9% of the ETFs assets, they make up 21% of fund's duration. You can think of duration as a measure of the price sensitivity to interest rates. In the case of PIMCO, the fund has a duration of 4.8 years. However, the municipal bond holdings have a duration of over 10 years. Should interest rates move, the impact on the value municipal bond part of the portfolio would be twice as big as the portfolio as whole (you can learn more about duration here):
What does Bill Gross have to say about the Municipal Bonds?
PIMCO continues to see value in high quality municipal bonds and we retain our preference for essential service revenue bonds such as water and sewer, power, and airports.
- From Gross's Monthly Commentary August 2012
Bill Gross tweets:
10-year AA munis sell at 115% of UST. If/when tax rates go up, munis become more valuable still.
Top 5 Municipal Bond Issues Held By BOND
|Name Of Bond||% of BOND's Portfolio As Of 8/31/2012||State Of Issuer||CUSIP #|
|NYC TRANS FIN-E-1||1.26%||NY||64971QTQ6|
|MET ATLANTA TRANSIT-A||0.57%||GA||591745M27|
|FL BRD OF EDU-REF-D||0.54%||FL||34153PT32|
|NY LIBERTY-TRD CTR GO OF AUTH||0.49%||NY||649519BU8|
|NY DORM INC TAX-A||0.46%||NY||64990EDF1|
The Bottom Line
We follow bond related news closely here at Learn Bonds, and recently there have been an increasing number of headlines questioning the safety of the municipal bond market. While it is interesting to read what the pundits have to say, we find it more practical to watch what the real experts are doing.