PIMCO's Total Return Bond Fund - Potentially back on buy list

Bill Gross's $200 Billion Fund Flees U.S. Bonds into Foreign Assets


Jan. 20, 2010, 12:08 AM

Latest data from PIMCO's Total Return bond fund shows how manager Bill Gross has massively shifted his fund's allocation into the foreign bonds of developed countries.

As shown in the table below, taken from the latest fourth quarter Pimco report, 'Non U.S. Developed' debt has jumped to 16% of the portfolio vs. just 3% the quarter before. That's an enormous shift in exposure given that it happened over just three months for this $200 billion fund.

(Click on chart to enlarge it for easier viewing)

Furthermore, he's slashed his exposure to both U.S. 'Government-Related' (to 32% from 48%) and 'Mortgage' (to 17% from 22%) securities. 'Net Cash Equivalents' meanwhile spiked to 8% of the fund vs. 2% in September. It's pretty clear Mr. Gross expects a rocky road ahead for U.S. fixed income:

PIMCO Q4 Total Return Fund Report: While PIMCO does not expect the Fed to tighten any time soon, there is still the question of how negatively markets will react as the Fed winds down its unorthodox policies that were designed to inject liquidity into the financial system. These policies include the Fed’s program of purchasing mortgage-backed securities.

The current environment is characterized by a high level of policy uncertainty and relatively rich valuations for many fixed income assets. This setting argues for caution in terms of overall risk exposure in portfolios, but PIMCO believes there are still a number of prudent strategies available to enhance potential.

Emerging Markets and Currency – PIMCO plans to take exposure to high quality EM credits such as Mexico, Brazil, Korea and Russia, which have low levels of debt relative to the size of their economies. We also will look to take positions in select EM currencies, such as Brazil and China, anticipating that faster growth in these economies should allow their currencies to gain versus the U.S. dollar.

In light of the shift in the asset mix of the world's largest bond fund, I have put PIMCO's Total Return bond fund (PTTAX) back on the potential buy list.

Market Commentary

The markets gave back most of their 2010 gains in one fell swoop to close out last week. There have been recent fears that the markets might correct with the onset of earnings season. Intel Corp. and Alcoa Inc. both closed negatively after their reports.


This week's earnings reports will likely be the catalyst that pushes the markets either into a deeper correction or resumption of the rally.

Despite the weakness in the S&P 500, as represented by the etf, SPY, it is still above its recent base and above its rising 20-day moving average. If SPY were to close below the $111.50 support level we could expect a further decline.

We will have to wait to see what transpires this coming week.

(Click on chart to enlarge it for easier viewing)

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Just Follow the Money

Is there a group of investors that we can say may be responsible for triggering new upside rallies?

Take a look at today's chart and decide for yourself.

This chart goes back to July of last year and shows the instances where the Institutional Investors have changed their "directional shift" to positive (above zero).

There are six instances showing that shift, and if you look at the S&P 500, you would have to say there is a pretty good correlation, wouldn't you?

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When the Fed Stops the Music

The Federal Reserve has been very clear about the fact that they intend to stop their quantitative easing program at the end of March. What that means in practice is that they are going to stop buying mortgage backed securities. Those mortgage purchases helped keep mortgage rates low. Interest rates on government bonds have begun rising in anticipation of the Fed’s plan to curtail the mortgage purchase program.


I recently liquidated funds holding mortgage back securities (Pimco Total Return Fund and TCM Total Return Fund). Our moving average stop strategy, which is based on share price trends, gave us a clear sell signal in December. Our decision to sell was further supported by the Fed’s plan to end their mortgage purchase program.

We continue to favor high yield (junk) bond funds. They remain in a low volatility uptrend. Also, high yield funds are generally immune to the day to day ups and downs of the stock market. At the moment these funds offer the highest risk/reward ratio available to investors. We like 'em!

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Market Observation 01 14 10

The US financial system and the market have come back from the brink of disaster. While fear has resided significantly, serious problems remain. Housing has yet to recover, commercial property is in trouble, consumer spending is continuing to contract and the economy is not creating new jobs.


Don't let the dismal economic picture stop you from recognizing that the stock and corporate bond markets are in bull market uptrends. That is just the result of the massive infusion of cheap government money.

Regardless of whether you agree with the current monetary and fiscal policies, easy money always makes its way into the financial markets before it really has any effect on the economy.

In the long term we need to have jobs come back, ironically however, the current joblessness my actually be a plus for the stock and bond market. Why? A jobless recovery will keep a lid on both interest rates and inflation. Rising interest rates and inflation are negative for the market. Stable interest rates and low inflation are a big positive for the market.

Because of the unique circumstances of this cycle, there is legitimate concern about just how much the massive infusion of liquidity will actually stimulate economic growth, but there should be no question about its impact on the stock and bond markets.

Alcoa's Earnings Report Spooks the Market

Wall Street pressured by an 11% drop in Alcoa. S&P 500 snaps a six-session win streak.