Pimco spies ‘end of the bond market rally,’ unloads Treasuries

Pacific Investment Management Co., which runs the world’s biggest bond fund, said it sold Treasuries on expectations a second round of debt purchases by the Federal Reserve will have limited impact.

“The market is very clearly anticipating that the Fed is going to act,” Douglas Hodge, chief operating officer, said in an interview at the World Knowledge Forum in Seoul today. “The challenge right now is the breadth of policy measures that can be taken by the U.S. is rather limited.”

The Fed purchased $300 billion of Treasuries in 2009 under a policy known as quantitative easing, or QE, and traders are preparing for another round of buying they’ve dubbed QE2. Hodge’s comments come as some investors voice concern that record-low Treasury yields will curtail demand for U.S. bonds as the Fed acts to spur economic growth.

“Even if the QE process is large and rates decline further, in our view we’re approaching the end of the bond market rally,” Hodge said. “From where we sit, it’s very hard to suggest there’s going to be that kind of price appreciation that we’ve seen in bonds over the last 12 to 24 months.”

Pimco Chief Executive Mohamed A. El-Erian has said the minutes of the Fed’s September policy meeting show the central bank will increase its Treasury purchases on Nov. 3 at the end of its next meeting.

The U.S. two-year note yielded 0.367 percent as of 8:20 a.m. in London, according to BGCantor Market Data. The rate dropped to a record low of 0.327 percent on Oct. 12.

“We have reduced our Treasury holdings, the lowest yielding instruments,” Hodge said today.

Bill Gross, who runs the record $252 billion Pimco Total Return Fund, said last month he is looking for opportunities in sovereign bonds.

“Pimco Total Return currently is employing what we call a ‘safe spread’ strategy, which seeks to identify sovereign countries best able to handle a new normal global economy that envisions slower growth and therefore increasing credit risks in fixed-income markets,” Gross wrote in an e-mail.

Gross has said a new-normal era will be marked by slow growth in developed economies and below-average returns.

Amid ebbing growth prospects for developed countries, Pimco is increasing its focus in emerging markets, such as India, China and Brazil, Hodge said, with infrastructure debt looking attractive.

“There’s clearly great need to develop infrastructure,” he said. “We think it’s going to be burgeoning sector in all of these countries as they begin to open their capital markets.”

Pimco is buying high-quality corporate bonds in India and and has investments in China via the non-deliverable forward market, according to Hodge.

The Total Return Fund handed investors a 12 percent gain in the past year, beating almost three-quarters of its peers, according to data compiled by Bloomberg.

Pimco, which managed more than $1.1 trillion of assets as of June 30, according to its website, is a unit of Munich-based insurer Allianz SE.

Related Topics: Pacific Investment Management Company (Pimco)