We will see how you will do on this trade. You are long bonds as of Friday 13, 2010. Time reveals everything in trading. From your tone, I have a feeling that the market might hit you on your nose, but I wish you a better fate.
Aug. 13 (Bloomberg) -- Bill Gross, who runs the worldâs biggest bond fund at Pacific Investment Management Co., reduced holdings of U.S. government-related debt in July as yields tumbled. The companyâs $239.3 billion Total Return Fundâs investment in the debt was cut to 54 percent of assets last month, from 63 percent in June, according to the website of Newport Beach, California-based Pimco. The share of emerging-market debt increased to a record 11 percent, from 10 percent. The fund also boosted mortgage debt to 18 percent, the most since September. The fund has returned 12.8 percent in the past 12 months, beating 70 percent of its peers, according to data compiled by Bloomberg. It gained 1.95 percent over the past month, a performance superior to 78 percent of competitors. Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.1 trillion of assets as of June 30. Pimcoâs U.S. government-related debt category can include conventional and inflation-linked Treasuries, agency debt, interest-rate derivatives, Treasury futures and options and bank debt backed by the Federal Deposit Insurance Corp., according to the firmâs website. Gross boosted the Total Return Fundâs mortgage composition in July from 16 percent in June. It increased its high-yield holdings to 4 percent, from the 3 percent level, and non-U.S. developed debt to 5 percent from 3 percent. It increased its net cash-and-equivalent position to negative 12 percent from negative 15 percent. Eight-Month High Gross boosted the fundâs composition of government-related debt to an eight-month high in June, following weaker-than- expected economic reports. He said earlier this month that the Fed is unlikely to raise interest rates for two to three years as it seeks to keep the economy from slipping back into recession. The Fed retained a commitment to keep its benchmark interest rate close to zero for an âextended periodâ of time in its statement on Aug. 10, holding the target lending rate for overnight lending between banks at zero to 0.25 percent. âWhen you analyze that portion of the curve, it says the Fed is on hold for a long, long time,â Gross, said on Aug. 6 during a radio interview on âBloomberg Surveillanceâ with Tom Keene. âWhen you get down to 50 basis points on two-years, thatâs giving you a signal that thereâs not much left on the table.â Two-Year Note Two-year note yields touched a record low 0.4892 percent on Aug. 11, a day after the central bankâs decision to reinvest principal payments on mortgage assets it holds into U.S. debt to support the economy. http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aowsLKb6uUcg Mr. Gross has great success in talking his book. And the followers are laughing with him, too. 12.8 % is an excellent result taking nto consideration the pure size of PIMCO´s holdings. The cut in government expousre is self-explanatory. I will not call for a top in T Bonds, but the FED announcement to buy at the long end "helps" the exit strategy not only of PIMCO, it helps also to bring "cash" into the market which needs to be reinvested. As I understand Gross lately in an interview IG corporate debt is his next large investment target. Corporate America will need "it".
Let me try this one more time. As Bone correctly pointed out, traders get paid on price, not yield. YTM is useless as 99% of trader don't hold to maturity. They trade the cash and the futures, sometimes together. Most bonds funds, yes including corporate bonds funds are having their best years ever, some making close to 50% the last few years. Some of those high yield corporates were trading under 50 in 2008 and are now close to a double. Government bonds are on fire as well. The 30 year just traded a 132 handle. The bond longs are making a killing. I was speaking about government and corporate bonds in general. As to the 3 year 1% paper IBM just put, has it not occurred to some of you that the CDS might have been trading at 50 basis points. And that someone was buying the 3 year paper to finance to swap? Basically owning the swap for free. Giving them a chance to make a killing if this market and economy weakens in the next 3 years? Do any of you guys ever think outside the box? This paper gets issued for many reasons. Obviously there is an insatiable demand in the corporate paper now due to the large influx of money coming from corporate bond funds and bond ETF's that have to buy the paper. But the paper also facilitates hedging as well. Trust me, people are making money on it.
I am actually long PIMCO overweight in the 401K and in the spec account futures options vis-a-vis a ZN bull spread ITM. I've started scaling modest profits by selling Dec 130 calls Friday, a few more today, looking for 128 in the ZN future to be all out the spec position in terms of positive deltas. The 401K is long PIMCO and long commodities - dumb luck, both of them were not supposed to go up.
This argument doesn't make much sense - in order for a trader who buys bonds at < 1% yield to make money on price, he has to find someone else willing to buy them at an even lower yield. Even if multiple short term traders are involved, eventually someone has to hold the bonds to maturity. What doesn't make sense is why that someone would be willing to accept a < 1% yield.
What is so especially heinous about <1% yield? I know I keep beating the same dead horse, but do you know where 3y JGB yield is? People are happily buying those at 15bps, so, to them, 1% might look like a bargain here.
What's so heinous is the risk-reward profile. If the bet comes right, and we have a lost decade, you make 1% on your capital. If you're wrong, and yields go up, you could lose 20% on price. Cash seems a far-superior position.