To get the Best of the Bond Market delivered to your email daily click here.
There was a time when Bill Gross could do no wrong, over the past 40 years Gross has built PIMCO into the worlds largest bond fund, while gaining a reputation for being a no nonsense kind of guy.
But now the 70 year old bond veteran can’t seem to do anything right. PIMCO has been lurching from crisis to crisis for the best part of a year now.
To see a list of high yielding CDs go here.
First we had the shock resignation of long-time lieutenant Mohamed El-Erian in January, with the Wall Street Journal reporting that the relationship between Gross and El-Erian had become strained over the previous twelve months, with the two openly clashing in front of employees.
This was followed by reports about Gross’s idiosyncratic management style, which describes a bizarre often silent world and a system of “demerits” for failure to follow the chief’s protocols.
Then there was the bizarre outburst by Gross against his former Co-Chief investment officer, in which he called on El-Erian to come clean on why he left the bond giant, despite El-Erian having signed a non-disclosure document before his departure.
And just when you thought it couldn’t get any worse, news breaks that the Securities and Exchange Commision (SEC) is investigating the way the group’s $3.6bn Total Return Exchange Traded Fund bought and valued bonds.
The investigation centers around whether PIMCO bought investments at one price and then used a higher valuation when calculating the values of its holdings and whether this subsequently gave investors a misleading picture of the fund’s performance.
News of the investigation comes at a difficult time for PIMCO and Gross. Although the fund has a reputation for anticipating changes in the economy far ahead of rivals, it has suffered in recent months as investors withdrawn money, with the group’s flagship Total Return (TLT) fund suffering 18 successive months of outflows.
Despite all this there are no calls for Gross’s head, not least because PIMCO’s performance has improved lately. But questions about Gross’s leadership remain and investors are still abandoning the fund in droves.
Can Gross survive this latest crisis? Assuming the SEC doesn’t find anything untoward, and PIMCO continues to deliver strong returns, I suspect he can. Ultimately it will be PIMCO’s performance that determines his fate.
Todays Other Top Stories
Learn Bonds: – Concern over weak economy causes inflationary expectations to drop. – If longer-term investors cannot live with such volatility, then bonds are probably not the place they should be.
Charles Schwab: – Not always tax free: 7 tax traps of municipal bond investing. – Although municipal bonds are one of the few investments that pay interest that is generally exempt from federal income taxes, the interest payments are not always free from all taxes. Below we identify some of the taxes that could apply if you buy muni bonds.
ValueWalk: – Municipal bond market: The state of states. – A change of seasons should be noted by municipal investors, as a seasonal increase in new issuance may be a catalyst to lower returns after a strong 2014. It is not uncommon for revenues to slow as the economy matures, and we do not view the slowdown in state tax revenues as worrisome for municipal bond investors.
Governing: – Striking a balance on muni bonds. – Let’s dispatch with the bad news first: The municipal bond market has taken yet another hit this month. A new federal rule excludes muni bonds from the liquid assets that banks must hold in case of an emergency. Issued by the U.S. Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, the rule exists to make sure banks have enough assets on hand that can quickly be converted to cash in the event of a financial crisis.
WSJ: – Fed’s Bullard still looks to 1st quarter 2015 Fed rate increase. – (Subscription required) Federal Reserve Bank of St. Louis President James Bullard said Tuesday that he still sees the U.S. central bank raising interest rates some time early next year.
Barron’s: – Consider a no-drama bond market. – (Subscription required) While the unwinding of the monthly purchases of billions of dollars of mortgage-backed securities and other bonds has been going on for many months, markets are now increasingly attuned to what comes next. And the primary question is quite simple: will interest rates rise and if so, by how much and when?
Reuters: – Bond yields dip on weak U.S. durable goods, services sector data. – Long-dated U.S. Treasuries yields fell to their lowest in over two weeks on Thursday after weak U.S. durable goods orders and services sector growth cast doubt on the strength of the U.S. economy and fueled safe-haven bids.
Financial Post: – Why the ‘broken’ corporate bond market needs an overhaul. – The world’s largest money manager says the corporate bond market is broken and it is time for change. But why?
High Yield Bonds
Businessweek: – Phones 4u fallout blindsides junk corporate borrowers. – Fallout from the collapse of Phones 4u Ltd. has shaken investor confidence in the sterling high-yield debt market with bondholders in the U.K. retailer facing losses of as much as 275 million pounds ($450 million).
24/7 Wall Street: – Short sellers run for cover in defensive high-yield dividend stocks. – The short interest data for the September 15 settlement date are out, and we have decided to look at what is happening in the short interest of the go-to high-dividend defensive stocks.
Advisor Shares: – Is this time different? A look at duration. – Generally speaking, we believe that the factors that have helped insulate the high yield market from higher rates in the past still are valid today.
WSJ: – Junk-bond investors start to see warning signs. – (Subscription required) Some managers begin to pare riskiest holdings as they gird for long-running rally to falter.
Wisdom Tree Blog: – Playing defense in emerging market fixed income. – While high yield flows continues to dominate the headlines, emerging markets have generally flown under the radar in recent months. In this discussion, we focus on how investors may be able to best position against a change in Federal Reserve policy while maintaining income potential from investments in emerging markets.
Citywire: – Risk or reward: should you invest in emerging market debt? – Interest in emerging market debt as an income generator has increased among some advisers and fund managers, but others are still wary of the level of risk involved.
ETF Channel: – SPDR Barclays high yield bond (JNK) enters oversold territory. – In trading on Thursday, shares of the SPDR Barclays High Yield Bond ETF entered into oversold territory, changing hands as low as $40.07 per share. We define oversold territory using the Relative Strength Index, or RSI, which is a technical analysis indicator used to measure momentum on a scale of zero to 100. A stock is considered to be oversold if the RSI reading falls below 30.
PIMCO: – Europe’s commercial real estate deleveraging: ‘Not too fast, not too slow’. – As European bank deleveraging accelerates, we expect that commercial real estate (CRE) will continue to constitute a significant proportion of bank assets to be sold, albeit with a shifting geographical mix.
ETF.com: – 3 Overreactions To PIMCO’s Probe. – If PIMCO has been buying bonds at a discount, then using a pricing service to value its bonds. It is my belief that both of these are not only standard practice, but pretty much the only option. Has PIMCO actually done anything wrong?
ETF Trends: – PIMCO BOND ETF going about its business. – A day after it was revealed the Securities and Exchange Commission is investigating pricing practices at the PIMCO Total Return ETF, ETF version of the storied Total Return mutual fund is again showing no signs of unusual trading activity except above-average volume.
Bloomberg: – PIMCO’s ETF probe said to be separate from industry sweep. – The U.S. regulatory probe into Bill Gross’s Pimco Total Return ETF is separate from a broader scrutiny of disclosure in the exchange-traded fund industry, according to a person familiar with the matter.
US high yield bonds are a short-maturity asset class (avg 6.5 years). Their spread over USTs is now 455bps.
— Stephen Baines (@spbaines) September 25, 2014
Detroit City Council on break from closed session. Members say a deal to keep Orr around thru city’s bankruptcy trial is close to done.
— Joe Guillen (@joeguillen) September 25, 2014
— Cate Long (@cate_long) September 25, 2014