Wednesday, 14 Nov 2018
Business

The 'Stay Rich' Crowd Are Coming Back to Pimco

Bond funds might be coming back in vogue.

Pacific Investment Management Co., a unit of German Insurer Allianz SE, added $ 11 billion of assets-under-management in the third quarter, reversing outflows from the prior quarter. It might be bigger investors inflow after years of super-low bond yields caused by quantitative easing. Certainly the minutes of Thursday's U.S. Federal Reserve meeting will no longer show signs of decline, regardless of Donald Trump's complaints.

And this was all before October's shakeout of equities – though, in fairness, junk bonds had an ever tough time. Still, with the relentless upward march of equity indexes finally weakening, fixed-income funds might be the beneficiary.

It helps that one trusted old guide has finally broken above the net gain line. Three-month Treasury bills at 2.34 percent are higher than inflation, so debt investors are finally starting to get a real return. This is the second half of the year, and it is better than a forward dividend yield on the S & P 500 of about 2 percent.

The U.S. Treasury yield curve is still remarkably flat, with only an extra 45 basis point gain in yield between two-year and 30-year notes. So there's a little incentive to venture out of shorter maturity cash bills and bonds. That's why the extra return from corporate credit is more appealing. The average yield on the Barclays Bloomberg U.S. Corporate High Yield Total Return Index is at 6.7 percent.

So it's little surprise that Pimco's growth is not coming from its old flagship Total Return Fund, which tends to stick mostly to plain vanilla stuff but reduced from $ 300 billion to a little under $ 60 billion now. It is coming from so-called "enhanced cash strategies," which brings more credit risk and higher yields. This is fund-speak for investing in higher-yielding corporate debt rather than government bonds.

Inflows are not only emerging from nervous stock investors but also emerging markets that had a torrid summer amidst crises in Turkey and Argentina. Domestic U.S. bond funds offering comparably higher yields are the logical alternative until U.S. growth starts to falter, explaining Pimco's recent appeal. Once the super-economic economy slows, its government bond-heavy funds will get their moment in the sun, which would be fine for Pimco too.

Bond investing can not be more of a get-rich strategy, but at least it has recovered some of its stay-rich charm.

To contact the author of this story: Marcus Ashworth at mashworth4@bloomberg.net

James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently at the Haitong Securities in London.

© 2018 Bloomberg L.P.

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