Bloomberg News

Bond Exodus at Broad Funds Hits Pimco, JPMorgan: Credit Markets

November 12, 2013

JPMorgan Chase & Co. Flag Flies

JPMorgan's $24.6 billion Core Bond Fund had the third biggest outflow with $4.6 billion of redemptions, while American Funds' $28.2 billion Bond Fund of America reported $4.8 billion of withdrawals. Photographer: Scott Eells/Bloomberg

In a year of record withdrawals from taxable bond funds, no category has been harder hit than the biggest broad market strategies managed by firms from Pacific Investment Management Co. (PTTRX:US) to JPMorgan Chase & Co.

Investors yanked $61.8 billion from intermediate-maturity debt funds in the first nine months of the year, while pouring $46.2 billion into bonds maturing in less than three years, according to data compiled by Morningstar Inc. Buyers are showing a preference for shorter-maturity and high-yield bonds that are less sensitive to rising benchmark borrowing costs as the Federal Reserve weighs curtailing the pace of its unprecedented stimulus that’s bolstered credit markets.

Concern is mounting that a general basket of bonds won’t preserve income and generate returns for investors who reaped average annual gains of 6.3 percent from the start of 2009 through last year. As the central bank prepares to start slowing its bond buying, the Bank of America Merrill Lynch U.S. Broad Market Index is on pace for its first annual decline since 1999.

“People aren’t getting enough income from their bond portfolios as they need,” Michael Rawson, a fund analyst at Morningstar in Chicago, said in a telephone interview. “You’re going to see money come out of intermediate bond funds and into these more income producing bond categories.”

Pimco, JPMorgan

Investors withdrew $28.1 billion from Pimco’s $247.9 billion Total Return Fund in the first nine months of the year, the most among all intermediate bond strategies, Morningstar data show. JPMorgan’s $24.6 billion Core Bond Fund had the third biggest outflow with $4.6 billion of redemptions, while American Funds’ $28.2 billion Bond Fund of America reported $4.8 billion of withdrawals.

In the same period, non-traditional bond funds that give managers more flexibility in how they invest received $45 billion of deposits, Morningstar data show.

“While core bond categories have experienced outflows industry-wide, we have continued to see inflows into our absolute return and unconstrained strategies,” Mark Porterfield, a spokesman for Newport Beach, California-based Pimco, said in an e-mailed statement.

JPMorgan’s Core Bond Fund, which was started on Dec. 31, 1983, and focuses on investment-grade notes with medium-term maturities, reported a $2.3 billion withdrawal on Oct. 28, spurring the biggest weekly outflow from U.S. investment-grade debt funds since June, according to data compiled by Bloomberg.

High Yield

While there have been some withdrawals from JPMorgan’s core bond strategies, “most of the outflows have come from clients aiming to diversify their fixed-income portfolios,” with many of the same clients depositing money into flexible debt funds, Gregory Roth, a spokesman for the New York-based firm, said in an e-mailed statement.

The withdrawal last month reflected a client moving assets from the Core Bond fund into a different vehicle managed by the firm and not a rotation of money out of investment-grade debt, Roth said.

Buyers pulled $2.2 billion from broader bond strategies in the U.S. during the week ended Oct. 30, the biggest outflow in more than three years, data compiled by Royal Bank of Scotland Group Plc show. Funds focused on high-yield bonds reported $752.7 million of deposits in the period.

Speculative-grade debt, rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s, is less sensitive to rising interest rates because of the bigger premium it pays over benchmarks.

Notes Underperform

Pimco’s Total Return Fund, started in 1987 and managed by Bill Gross, has shrunk by an estimated $37.5 billion since the start of this year, ending October with about $248 billion in assets, according to data provided by Pimco and compiled by Bloomberg. It ceded its title as the world’s largest mutual fund to Vanguard Total Stock Market Index Fund, which ended October with $251 billion.

Medium-term notes are poised to under-perform shorter-term ones for the first year since 2008, when the Fed embarked on an unprecedented quantitative easing program to jump start the world’s biggest economy from the depths of the financial crisis.

Corporate bonds maturing in five to seven years have declined 0.01 percent this year compared with a 1.6 percent gain for notes maturing in one to three years, Bank of America Merrill Lynch index data show.

Treasury Yields

The Bank of America Merrill Lynch U.S. Broad Market Index has lost 2.01 percent this year after posting a 2.45 percent decline in the three months ended June 30, its biggest quarterly loss since the start of 1994. The index gained 4.53 percent in 2012.

Fed Chairman Ben S. Bernanke rattled fixed-income markets in May by telling Congress that the central bank may reduce the pace of its $85 billion of monthly purchases of Treasuries and mortgage bonds if the economy showed sustained improvement.

Yields on 10-year Treasuries rose as high as 3.01 percent on Sept. 6, up from 1.76 percent at the end of December, as speculation mounted that the Fed would change the pace of its bond buying at its September meeting.

While policy makers surprised forecasters by maintaining the level of stimulus, yields reached a seven-week high of 2.75 percent at the end of last week as reports showed the economy expanded in the third quarter beyond projections and added more jobs in October than forecast.

‘Overriding Factor’

“We’re in an environment where the likelihood is that interest rates are going to move higher and that hasn’t been the case for 30 years,” Gregory Kamford, a credit analyst at RBS in Stamford, Connecticut, said in a telephone interview.

Since the end of May, investors have removed $14 billion from U.S. intermediate-maturity corporate bond funds while putting $11.6 billion into funds focused on one-to-three year corporates and $12.9 billion into notes due in more than 10 years, RBS data show.  

Fidelity Investments, which manages $1.9 trillion globally, started three funds that focus on short-term bonds to address investor concern over rising interest rates, the Boston-based firm said today in a statement.

“The only logic to follow at the moment is whether the central banks continue to supply the capital market with more liquidity,” Arthur Tetyevsky, a credit strategist at Imperial Capital LLC, said in a telephone interview. “That seems to be the overriding factor.”

Shell Bonds

Elsewhere in credit markets, the cost of protecting corporate bonds from default in the U.S. rose, with the Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, increasing 1.3 basis points from Nov. 8 to a mid-price of 73 basis points as of 1:09 p.m. in New York, according to prices compiled by Bloomberg.

Bond markets in the U.S. were closed yesterday for the Veterans Day holiday.

The measure typically rises as investor confidence deteriorates and falls as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Royal Dutch Shell Plc plans to sell dollar-denominated bonds in a four-part offering of notes due in five years or fewer after Europe’s biggest oil company borrowed $3.75 billion of longer-term debt three months ago. Its Shell International Finance (RDSA) unit intends to sell two portions of floating-rate bonds due in two and three years and fixed-coupon notes that mature in three and five years, according to a person with knowledge of the offering.

Bonds of Verizon Communications Inc. (VZ:US) are the most actively traded dollar-denominated corporate securities by dealers today, accounting for 3.6 percent of the volume of dealer trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The New York-based telephone carrier raised $49 billion on Sept. 11 in the largest corporate bond issue ever.

To contact the reporter on this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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Companies Mentioned

  • PTTRX
    (PIMCO Total Return Fund)
    • $10.84 USD
    • -0.01
    • -0.09%
  • VZ
    (Verizon Communications Inc)
    • $47.05 USD
    • 0.61
    • 1.3%
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