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Sometimes, the financial markets give us a second opportunity to make money or avoid a loss.
That’s exactly what’s happening today.
Back in May, Fed Chairman Ben Bernanke announced “tapering.” He was referring to a coming reduction of the $85 billion monthly bond-buying program known as QE3.
Since May, the yields on Treasury bonds have surged 80%. For example, the 10-Year Treasury’s yield jumped from 1.66% on May 1 to as high as 2.98% in early September.
Bond values fell as a result. The Pimco Total Return (NYSE: BND) is the biggest bond mutual fund in the world. It dropped 7.2% in the same period. That’s not a huge decline, but it’s a decent loss for investors in a bond fund.
That’s particularly true when you consider that the fund yields 3.46%. At that yield, it’ll take investors two years to recoup their losses from the move in interest rates.
But since early September, an interesting thing has happened in the world of bonds: yields have been falling.
Since its high, the U.S. Treasury 10-year yield has dropped 11%. It now stands at 2.65%.
That’s because the Fed has delayed tapering. At last week’s FOMC meeting, the Fed announced no changes to the bond-buying program.
The slow economic recovery is largely the reason. And the U.S. government shutdown and debt ceiling debate certainly aren’t helping the country’s economic growth or unemployment rate.
The September jobs data was worse than expected, with only 148,000 jobs added. That was about 20% below the average monthly number of new jobs. With the U.S. unemployment rate far above “healthy” levels at 7.2%, the Fed remains hesitant to curb economic growth by raising interest rates.
As a result, bond prices have recovered some of their losses. For example, the Pimco Total Return has recovered nearly half of its earlier losses.
In my $100k Portfolio, I own Pimco Total Return. Managed by billionaire fund manager and bond king Bill Gross, Pimco has historically been an amazing performer. Over the last five years, the fund has delivered 8% annual returns. That was enough to beat the benchmark by 2%. For a fund with $250 billion in assets, that performance is impressive.
Yet this year, the fund is down 1.5%. That performance – coupled with concerns about a coming bond bubble – has encouraged some investors to sell the fund. September was the fifth consecutive month of outflows. In total, nearly $29 billion or 10% of assets have been pulled out of the fund by investors.
I’ve owned Pimco since early 2009 and it’s been a consistent fixed income performer. Yet ever since the Fed’s tapering plans were announced, I’ve been looking for a good time to reduce my exposure to this fund.
The recent rebound for bonds provides that opportunity. Bond yields have fallen, and values have risen. And that makes now the best time to sell bonds since June.
Yesterday, I decided to cash in on the recent rebound for bonds. I view this as a second chance to cash out before the Fed actually begins tapering its bond-buying program. When it does, look for bond yields to rise, and values to fall once again.
I don’t know if tapering will happen on Bernanke’s watch before the end of 2013 or in 2014 once Janet Yellen takes over as the Federal Reserve chairman. Either way, we know that QE3 will come to an end. And we know that bond owners will suffer losses along the way.
While I wish I had cashed out of Pimco sooner, the market is giving us a second chance to sell the fund and book a profit. If you own Pimco Total Return or other bond funds, you may want to consider doing the same.