Twin bond, dollar selloffs hit Pimco Total Return Fund

By Jennifer Ablan

NEW YORK (Reuters) – The Pimco Total Return Fund, which last month lost its crown as the world’s biggest bond fund, is now losing some momentum in performance.

So far in May, the flagship fund, which has $110.4 billion in assets, is posting a negative return of 2.22 percent, lagging its benchmark by 0.70 percentage points and peer fund category by 0.92 percentage points, according to Morningstar data on Wednesday.

Bets on low European yields and a rising dollar dragged the fund lower in April and May. The recent turn has reduced Pimco Total Return Fund’s year-to-date return to just 0.38 percent, trailing 64 percent of its peer fund category, Morningstar data show.

Pimco declined to comment. The Pimco Total Return Fund hit a peak of $292.9 billion in assets under management in April 2013.

In its April 30 report to clients, Pimco said dollar-strength positions, particularly against the euro, have hurt the Total Return Fund, along with duration and yield-curve positioning in the United States and exposure to core eurozone duration.

“Globally, we maintain exposure to diversifying sources of duration, including in Mexico and in the eurozone,” Pimco Total Return Fund managers Scott Mather, Mark Kiesel and Mihir Worah said.

The report showed Pimco had 14 percent of its Total Return Fund’s duration in Germany. Duration is a bond’s sensitivity to interest rate fluctuations, and going longer on duration is an investment strategy when rates are expected to remain low or drop further.

“The yield curve has steepened quite a bit, and their longer duration U.S. futures positions have been hit in this selloff,” said David Schawel, vice president and portfolio manager of Square 1 Financial.

“Additionally, it looks like exposure to German bunds and long dollar positions added to their losses.”

German 10-year Bund yields set record lows of 0.049 percent on April 17, as yields were affected by the European Central Bank’s stimulus program. After hitting that low on April 17, sovereign debt posted a selloff, causing yields to spike.

German Bund yields traded around 0.64 percent on Thursday.

Pimco portfolio managers said that they maintained their dollar-strength positions given expectations for “continued divergence in central bank policies around the world.”

Pimco also said they remained underweight U.S. duration, with a focus on intermediate maturities.

The euro has risen 9 percent to $1.14 since hitting a 12-year low against the dollar on March 16.

(Reporting By Jennifer Ablan; Editing by David Gregorio)

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