The Wall Street Journal-20080122-Where Bond-Fund Players Find Yield
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Where Bond-Fund Players Find Yield
The low yields on U.S. government debt have sent bond-fund managers looking for better returns elsewhere.
Investors such as Pacific Investment Management's Bill Gross, manager of the world's biggest bond-focused mutual fund, are finding value in mortgage-backed securities guaranteed by federally chartered housing-finance giants Fannie Mae and Freddie Mac, as well as straight debt issued by these companies and the Federal Home Loan Banks, or what is referred to as agency debt. What they get is yield above government bonds, while still holding something safer than junk bonds, stocks and emerging-market assets.
Mr. Gross's Pimco, a unit of Allianz SE, increased the share of mortgage-bond holdings in its $112.7 billion Total Return Fund last month to 66%, the biggest share since January 2002, compared with 7% in government debt.
Meanwhile, David Brownlee, head of fixed income at Sentinel Asset Management in Montpelier, Vt., which oversees $18 billion in fixed income, said he sold Treasurys to buy mortgage bonds and high-quality corporate debt.
The subprime turmoil has sparked recession fears and prompted the Federal Reserve to cut the federal-funds rate by a full percentage point since September, feeding the Treasurys market's biggest rally last year since 2002 as investors sought the safety of government debt. However, with the two-year yield dropping to the lowest level since 2004 last week and the 10-year yield falling to its weakest point since 2003, Treasurys are losing their appeal.
"There is virtually no yield on the Treasurys market anymore," Mr. Brownlee said. "The easy money has been made in Treasurys."
Mr. Gross, who earlier this month was honored by investment researcher Morningstar Inc. as the fixed-income manager of 2007, said in December extra yield of 1.50 to 1.75 percentage points on agency mortgage bonds over Treasurys made the debt look "extremely cheap."
Not everyone is scaling back their exposure to the super-safe government-bond market. Portfolio managers including Martin Schafer at Principal Financial Group in Des Moines, Iowa, and Brian Brennan at T. Rowe Price Group Inc. in Baltimore say Treasurys will stay well bid as investors pursue safety.
