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The past couple of months have proved to be a tumultuous period for bond giant PIMCO. The funds usually serene facade has been washed away by a series of allegations regarding the conduct of its Chief Executive Bill Gross.
It all started in February when the funds long time Co Chief Executive Mohamed El-Erian announced he was resigning from the firm. El-Erian’s exit was quickly followed by that of Marc Seidner, El-Erian’s lieutenant, who quit to run fixed income for GMO in Boston.
Later it emerged that El-Erian and Gross had come to blows over the funds performance, with a number of staff describing furious arguments between the two. It prompted a reaction from Mr Gross. “I’m so sick of Mohamed trying to undermine me,”, which also said Mr Gross had indicated he was monitoring his fellow executive’s phone calls.
All of this negative publicity has started to have an effect on PIMCO’s ratings, with Morningstar downgrading its “stewardship” rating on PIMCO’s funds, for fear that the new deputy CIOs might not have the “temerity” to challenge Mr Gross and that the decisions of PIMCO’s investment committee would be less robust as a result.
Morningstar noted that it has yet to change the ratings on PIMCO’s individual funds, but they did indicate they were currently assessing the funds and would release the findings later in the year.
Now it transpire investors are starting to get cold feet as well. Columbia Management Investment Advisers LLC, announced this morning that PIMCO was being replaced as the manager of a $1.3 billion bond fund by TCW Group.
In a statement on Thursday, TCW said the fund, previously known as the Pimco Mortgage-Backed Securities Fund, will become the TCW Core Plus Bond Fund.
All this is bad news for PIMCO, especially at a time when bond markets are approaching a period of instability. With the threat of rising rates, only 18 months away, bond managers need to be at the top of their game to stave off falling prices as rates rise.
Ironically, this could be just what PIMCO and Gross need. Despite his management failings, no one is calling Gross’s investing ability into doubt. Gross is a top class fund manager who has consistently outperformed the market over the past 40 years. With the threat of rising rates, PMCO needs a strong and experienced leader at the helm. If anyone can survive the coming storm better than anybody else, its Bill Gross.
Todays Other Top Stories
Bloomberg: – Jacksonville task force backs higher taxes to curb pension costs. – A civic task force recommends that Jacksonville raise taxes to meet soaring retirement costs that have left a pension fund in Florida’s most populous city with 39 percent of what it needs to cover promised benefits.
Bond Buyer: – California GOs different – and stronger – than Detroit’s. – LOS ANGELES – It’s a long way from Detroit to California. While the substantial haircut bankrupt Detroit wants to give its general obligation bondholders has caused municipal bond market ripples, the GO pledge should stay strong among California’s municipalities, market experts say.
Bloomberg: – BlackRock favors long-maturity munis seen as cheap to Treasuries. – BlackRock Inc. (BLK), the world’s largest asset manager, is looking to buy longer-dated municipal bonds on the view that those securities are cheap compared with federal debt.
Cate Long: – Cate Long on Puerto Rico’s Bonds: ‘Smell is worse closer to the poop pile’. – Cate Long, author of Muniland, talks about the municipal bond market in Puerto Rico and Detroit.
Bloomberg: – Detroit’s $85 million swaps deal not set, lawyer says. – Detroit’s proposal to pay $85 million to cancel interest-rate swaps that cost taxpayers more than $200 million, part of the city’s attempt to trim debt in bankruptcy, won’t be in final form until next week.
Income Investing: – High-yield sector continues to dominate muni-fund inflows. – Muni-bond mutual funds and ETFs recorded another week of modest inflows last week ($108 million), with the high-yield sector of the muni market ($152 million) again responsible for keeping the overall fund-flows total in positive territory.
Bloomberg: – Finra says it’s examining trading in new Puerto Rico bonds. – The Financial Industry Regulatory Authority is examining trading in the $3.5 billion of general-obligations that Puerto Rico sold this month, according to George Smaragdis, a spokesman for the independent monitor of the securities business.
Brick By Brick: – How to buy municipal bonds. – When a local government wants to construct a new toll road, school, or facility they typically have to borrow the money because they do not have the necessary funds available at that time. In order to acquire the necessary funding the local government obtains a loan from the public, this is “note” is called a municipal bond. We can all agree municipal bonds are great investments for individuals seeking tax free income. But how do you buy municipal bonds?
Market Realist: – Do mortgage rates follow movements in Treasury yields? – We are entering a new world where interest rates will not be so predictable. This is just something that all participants in the bond and money markets are going to have to accommodate.
WSJ: – Treasurys fall sharply after Fed decision. – Treasury bonds fell sharply Wednesday, pressured by concerns that the Federal Reserve could increase short-term interest rates sooner.
Market Realist: – Why the investment-grade bond market declined last week. – After weeks of good earnings releases that largely supported the U.S. equity market and the investment-grade corporate bond market, last week’s activity recoiled dramatically. Despite lower borrowing costs and yields, the primary corporate bond (LQD) market remained dull.
Businessweek: – Fed signals curb bond sales in U.S. to slowest pace in 11 weeks. – Sales of corporate bonds in the U.S. this week were the least since the start of the year as Federal Reserve Chair Janet Yellen signaled interest rates may rise sooner than investors expected.
Donald van Deventer: – Prudential Financial Inc: A bond market view. – The bonds of Prudential Financial Inc. rank solidly in the top quartile of the value rankings for all bond issues that traded at least $5 million in volume on March 19, 2014.
Income Investing: – Corporate bonds unfazed by Fed flare up. – If the Fed’s latest policy statement and economic projections gave many markets a start on Wednesday, corporate bonds were generally unfazed. Barclays credit strategists Jeffrey Meliand Bradley Rogoff say U.S. credit markets this week retraced most of their weakness from earlier this month, and the main catalyst for the credit rally was reduced concerns about the conflict in Ukraine instead.
Market Realist: – An update for high yield bondholders: Why the market fell last week. – The first possible reason—interest rate drives the bond market. When the market interest rates rise, new issuance offered in the market provides higher returns compared to the existing bonds. This means that the older bonds are worth less, and their market price falls.
Forbes: – High yield bond funds see 6th straight cash inflow, totaling $4.4B. – Retail-cash inflows to high-yield funds totaled $455 million in the week ended March 19, according to Lipper. This is the sixth consecutive inflow, for a net infusion of $4.4 billion over that span.
Wealth of Common Sense: – Time for a check-up on high yield bonds. – The interest rate spread between U.S. Treasuries and high yield corporate bonds, which currently sits at around 3.9%, is below the average and median by a decent amount and is causing concern that things may be on their way to getting out of hand.
Financial Advisor: – State Street offers international junk bond ETF. – The unwinding of the Federal Reserve’s bond buying program and expectations for continued strengthening of the U.S. economy means interest rates are likely to rise. In response, many investors are steering clear of long-duration corporate bonds and U.S. Treasuries––whose prices would be negatively impacted by rising rates––in favor of short-term and intermediate-term corporate bonds offering relatively higher yields.
abc News: – Emerging-market bonds on sale but not on clearance. – For all the worries about how the Federal Reserve’s cutback in bond purchases would hurt the market, the biggest pain is being felt far away. It’s in Indonesia, India and other developing economies.
The Guardian: – Bond market crash? Pffffft. – The next crisis is supposed to be in bonds, but there are plenty of ways they can protect your money and make more of it.
Bloomberg: – PIMCO replaced by TCW as manager of $1.3 billion fund. – Pacific Investment Management Co. was replaced by TCW Group Inc. as the manager of a $1.3 billion bond fund offered by Columbia Management Investment Advisers LLC, as the world’s biggest bond firm reorganizes management and faces client redemptions.
ETF.com: – New fund of bond funds. – iShares has put into registration a fund of funds dubbed the iShares Yield Optimized Bond ETF (BYLD) that will track an index composed of underlying iShares fixed-income ETFs spanning a range of investment-grade and non-investment-grade securities.
FT: – Brave new world of electronic bond markets. – As bond markets continue the march towards greater electronic execution, there are increasing signs that bond trading venues owned by single dealers will not have much of a role in the new world.
S&P’s upgrade of #muni bond insurers should help expand % of insured new issues, currently less than 5% of market vs pre-crisis peak of ~50%
— AnthonyValeri (@Anthony_Valeri) March 21, 2014
Increase should be modest though & mkt gotten past use of insured bonds realizing intrinsic quality of majority of #muni issuers.
— AnthonyValeri (@Anthony_Valeri) March 21, 2014
Long rates haven’t done much since the FOMC statement.
— Ed Bradford (@Fullcarry) March 21, 2014