$200 Billion Worth of Bond Advice: A look Inside PIMCO’s Strategy

(February 2012) PIMCO’s Total Return Fund invests over $200 Billion dollars of client funds, exclusively in fixed income investments. It is the largest mutual fundin the world, and has a track record that few can match. The fund has been managed by Bill Gross since its inception.What if you could privately ask Bill Gross what he thinks of the market? What if he told you in broad strokes what he planned to buy or sell? Would you be interested?Once per month, PIMCO shares its strategy with investors in its Monthly Commentary. Below is our takeaways from the most recent monthly commentary. Text in italics is directly taken from the report.

PIMCO Report Highlights

* Buying Bonds with 7 – 15 Year Maturities
* Bullish On Financials (Banks) US Corporate Bonds
* MBS are fairly valued but low risk.
* Finding Opportunities In High Quality Munis, Avoid GO Bonds
* Not Bullish On TIPS


PIMCO Report In Detail

Treasuries / Bonds In General

“We will seek to have a flattening bias with a concentration in the 7 – 15 year portion of the yield curve. This strategy offers greater opportunities for price appreciation and “roll down” relative to the short end of the curve, where rates and volatility remain suppressed by policies of the Federal Reserve”.
Key Points: The Fed is keeping the FED funds rate, which determines short-term interest rates, very low. On the other hand, the Fed has been buying longer dated Treasuries pushing down yields for 20 and 30 year treasuries. The only place where the FED has not been directly acting to keep down rates is in the middle of yield curve, securities with 7 to 15 year maturities. That is where PIMCO is buying. PIMCO implies that if rates remain low for shorter maturities that they may be selling these intermediate-term maturities (for a profit) as they approach the shorter end of the yield curve.


US Corporate Bonds

“PIMCO maintains its conviction that U.S. financials exhibit strong fundamentals and are well-positioned to recover from their underperformance during 2011″.
Key Point: An improving US economy is good for financial companies. There are lower defaults and more demand for borrowing. Financial Bonds did worse than bonds in other sectors last  year and PIMCO sees a potential rebound.  Examples of issues which they have held in the past and may still be holding are Citigroup (Ticker: C), JP Morgan (Ticker: JPM) and (Wachovia Ticker: WFC).


US Mortgage Backed Securities

“While current valuations are fair to full, agency mortgages exhibit attractive risk-return dynamics relative to low yielding cash and increasingly risky corporate credits”.
Key Point: “Fair Value” implies that PIMCO sees limited room for price appreciation. In another words, if you buy these you probably should be thinking about holding them to maturity. Most MBS have explicit or implicit government guarantees but yield more than treasuries.


Municipal Bonds

“We continue to see value in high quality municipal bonds, especially essential service revenue bonds such as water and sewer, power and airports”.
Key Point: Implictly, PIMCO is saying avoid General Obligation Bonds and don’t buy riskier (higher yielding) municipal bonds in general for a little more return.


TIPS (Treasury Inflation Protected Securities)

“PIMCO expects to retain exposure to the longer end of the steep TIPS yield curve while positive real yield dynamics exist within the asset class”.
Key Point: The 5 and 10 year TIPS actually have a negative yield. In order to make money, an investor would need there to be inflation. The 20 and 30 year pay a little bit of yield. Pimco is saying that they are not interested in buying a security where you need there to be inflation to make money.


  1. Sarath says

    Am curious, why are you only lkoniog at weekly HY fund flows and not including monthly flows, which are the larger component of fund flow in the U.S.? In fact, by negating monthly flows you paint a picture of negative YTD flows, when in fact, YTD aggregate flows are indeed positive, 2.2bn, not negative (3bn).

    • Marilyn says

      I think the best way for a beginner would be thogurh an Exchange Traded Fund. Mutual Funds require thorough research because you are trying to evaluate the abilities of individuals to actively manage your portfolio. Rather than spend that time (and money thogurh higher expense ratios), go with an ETF that will charge a tiny fee and give you broad exposure to the international markets.My recommendation would be to check out the iShares EAFE index fund (Ticker: EFA). It will provide you liquid, diversified exposure to Europe, Australia/New Zealand, and the Far East (Ex-Japan). If you have a bigger appetite for risk, you might also consider the emerging markets look at Ticker VWO from Vanguard or EEM from iShares.

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