Pimco Bond Guru Bill Gross Bets on TIPS and Loses - Businessweek

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Mutual Funds

Pimco Bond Guru Bill Gross Bets on TIPS and Loses

By Miles Weiss and Alexis Leondis
July 11, 2013

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On April19, three weeks before he said the 30-year bull market in bonds was over, Bill Gross announced he was buying TIPSTreasury Inflation-Protected Securities. In doing so, the bond guru bet that money printing by the worlds central banks would push up consumer prices. While the price of conventional Treasuries subsequently fell as he had predicted, so did the markets fear of inflation, driving down the value of TIPS. That amplified losses for Grosss $268billion Pimco Total Return Fund, which fell 4.7percent in May and June, prompting $9.9billion in withdrawals last month, the most on record. The losses highlight the difficulties Gross faces as he steers Pacific Investment Management, the investment firm he helped found. With $2trillion in assets, Pimco is

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http://www.businessweek.com/articles/2013-07-11/pimco-bond-guru-bill-gross-bets-on-tips-and-loses[5/08/2013 6:24:43 a.m.]

Pimco Bond Guru Bill Gross Bets on TIPS and Loses - Businessweek

Employer? Pimco's Spring Blunder

arguably up against the biggest market challenge since its inception in 1971. Gross has had 9percent to 12percent of Pimco Total Returns net assets invested in TIPS since at least the end of 2011, convinced that efforts by Federal Reserve Chairman Ben Bernanke and other central bankers to stimulate their economies will ultimately fuel inflation. TIPS were the biggest factor in Pimco Total Returns losses in May, according to Eric Jacobson, an analyst at Morningstar (MORN). Gross didnt respond to requests for comment. Rival Jeffrey Gundlach, head of the investment firm DoubleLine, has avoided TIPS, which he called a disaster and a trap during a webcast in late June, because he sees no sign of inflation. Gundlachs $38billion DoubleLine Total Return Bond Fund lost 2.6percent in the two months through June and is down 1.3percent this year as of July 5, beating 80percent of similar funds. TIPS guard against inflation because the principal value of the bonds is adjusted every six months to keep pace with consumer prices. One way to measure the markets view of inflation is to compare the yields of Treasuries and TIPS. The wider the gap, the higher the markets inflation expectations. Although yields on Treasuries have risen since May, when Bernanke raised the possibility of slowing the Feds monthly bond purchases, yields on TIPS have risen even faster. (Bond yields rise when prices fall.) As a result, from May1 to June24, the gap between 10-year Treasuries and 10-year TIPS narrowed to 1.92percentage points from 2.34, before widening to 2.08 on July8. The narrowing showed that investors viewed inflation as less of a threat and were cutting the price theyd pay for insurance against it, according to Daniel Shackelford, a fixed-income portfolio manager at T. Rowe Price (TROW). Inflation expectations havent budged after

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http://www.businessweek.com/articles/2013-07-11/pimco-bond-guru-bill-gross-bets-on-tips-and-loses[5/08/2013 6:24:43 a.m.]

Pimco Bond Guru Bill Gross Bets on TIPS and Loses - Businessweek

Can Pimco Break Free of Its Bonds?

three or four years of the Feds efforts to stimulate the economy, says Shackelford, who runs the $496million T. Rowe Price Inflation Protected Bond Fund (PRIPX). When the Fed started talking about slowing its bond purchases, he adds, it was sort of the worst news that the TIPS market could receive. TIPS funds fell an average of 7.2percent from the end of April to June28, more than double the 3.3percent decline in the Barclays U.S. Aggregate Bond Index, a fixed-income benchmark, according to Michelle Canavan, a mutual fund analyst at Morningstar. Gross made a bad bet on Treasuries almost two and a half years ago. In February2011 he eliminated his allocation to Treasuries, only to miss out on a rally in government bonds that left Pimco Total Return trailing 70percent of its peers. Gross, in a letter to clients at the time titled Mea Culpa , called 2011 a stinker. His fund lost an estimated $5billion to withdrawals that year, according to Morningstar. Pimco Total Return rebounded in 2012 to beat 95percent of peers and has outperformed 91percent of rivals over the past five years, according to data compiled by Bloomberg. So far, Gross is making no apologies for his bet on TIPS. In a June6 interview on Bloomberg TV he said that with the economy remaining weak, inflation will be contained in the short run. Even so, he said, trillions of dollars of check writing by the Fed and other central banks will fuel rising prices over the next three to five years. The bottom line: Weighed down by its holdings of TIPS, Pimco Total Return fell 4.7percent in May and June.
Weiss is a reporter for Bloomberg News in Washington. Leondis is a reporter for Bloomberg News in New York.

Companies Mentioned

MORN

MORNINGSTAR INC

$77.57 USD

0.46

0.59%

TROW

T ROWE PRICE GROUP INC

$76.35 USD

-0.40

-0.52%

PRIPX

T ROWE PRICE INFLATION PROTECTED BOND FUND

$12.56 USD

0.06

0.48%

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Mary Smith

http://www.businessweek.com/articles/2013-07-11/pimco-bond-guru-bill-gross-bets-on-tips-and-loses[5/08/2013 6:24:43 a.m.]

Pimco Bond Guru Bill Gross Bets on TIPS and Loses - Businessweek

Why is it that the justice system works when it goes one way and doesn't work when it goes the other? OJ Simpson... a black man.... was aquitted (wrongly) of killy his ex wife and her friend. That was okay because he was black and famous. Zimmerman is HISPANIC and while the death is a traedy, not every tradey is a crime. Under the law, he did not commit a crime. The prosecution was wrong as there was no evidence this was murder, second decree murder or even manslaughter (voluntary or involuntary). I believe that the fat cow who finally got the charges filed against Zimmerman had political asperations and I bet there was a backroom dea with our racist President and all the minions under him. I knew that once the jury wanted a clarification on manslauhter, he was going to be aquitted. For those of you who have not gone to law school, the definition off all these different types of killings are confusing and to bring manslaughter in at the last minute made the prosecution look desperate since they knew their butt was being handed to them. This is our system. They have no chance in a civil rights lawsuit but to appease the entitlement mentality of the followers, the may try. They will again have egg on his face.

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http://www.businessweek.com/articles/2013-07-11/pimco-bond-guru-bill-gross-bets-on-tips-and-loses[5/08/2013 6:24:43 a.m.]