How Risky Is a Bet In the U.S. Bond Market?

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Source: Thinkstock

Source: Thinkstock

It’s bear season in the U.S. bond market right now — just ask Pimco Co-Founder and Chief Investment Officer Bill Gross, whose $232 billion Total Return Fund, the world’s largest, produced the worst risk-adjusted return over the past year among its peers. Moreover, according to Bloomberg’s riskless return ranking, the Total Return Fund declined 1.2 percent for the year ended March 31, trailing 88 percent of similar funds, while experiencing volatility of 4.3, above the 3.6 average of its peer group.

The poor performance pushed investors away in droves. The Total Return Fund suffered record withdrawals of $41.1 billion last year. Pimco spokesperson Mark Porterfield defended the firm in a statement emailed to Bloomberg: ”We have a complete suite of products with different objectives and risk tolerances. It’s important to compare a fund’s performance with its benchmark and not just with other mutual funds, which could hold riskier and higher-yielding assets. Total Return has outperformed its index for the past 6 months, 2, 5 and 10 years.”

Porterfield is right on the money, but he doesn’t address the reason why Pimco lost some money — which is, in a word (or two), because of the awkward way in which the U.S. Federal Reserve’s aggressive and unconventional monetary policy is interfacing with the ongoing economic recovery. Monetary easing pushed interest rates to historic lows last year, and the taper has made the interest rate environment anything but predictable. Pimco’s poor performance was generally tied up in a bad bet on the timing and impact of the taper.

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