All Bond Funds Aren’t Equal

Bond investors had a rough time in May and June. Interest rates rose, and bond prices sank. But not all bonds and bond funds fared the same. As this article shows, some bonds fell more than others and some funds owed more of the “bad” bonds than others. PIMCO loaded up on TIPS before the decline, believing that higher inflation was on the way. DoubleLine funds didn’t, as manager Jeffrey Gundlach agrees with me that inflation isn’t much of a problem for a while. PIMCO’s made some bad calls before but recovered from them, so I wouldn’t read much into this about the long-term. But it shows that you have to look at more than a broad asset class, such as stocks and bonds, before making investment decisions.

After TIPS tumbled following lower-than-average demand at the Treasury’s five-year auction in April, Gross wrote in an April 19 Twitter message that he was buying more inflation-protected debt. And in a June 6 interview on Bloomberg Television’s “Market Makers,” Gross said he continued to expect that “trillions of dollars of check writing” by central banks would spur enough inflation during the next three to five years to give some “traction” for insurance against rising prices “on the TIPS side.”

Jeremie Banet, a Pimco portfolio manager who specializes in inflation-linked investments, said in an interview that the contraction of the break-even rate shows that the market doesn’t see the economic improvement that the Fed is citing as a basis for tapering. If the market did see that the economy was expanding, inflation expectations would rise, leading to a higher break-even rate, Banet said.