twisted return fund

Posted by

The FT reports that Bill Gross has taken the Total Return fund to a modified duration of 7.1 years (he made a low of 3.6yrs).

The FT has edited out the best bits of this article — when i first read the FT reported that Gross had moved the fund’s duration by 3.5yrs to 7.1yrs, and that the total return fund’s performance had been ranked 552/604 by Lipper.

My view is the Gross is making the same error twice. He sold all his Treasuries because the Fed stopped buying, and now he’s buying because Fed purchases have resumed.

It’s not the fact of buying or not buying that moves the market — it’s the element of surprise. Both QE2 and operation twist were so well flagged that they were pretty much in the price from day 1.

If the market is to rally further, we need Qe3 – but what we’re getting it better data. Macro still matters — the marginal buyer sets the price (which is why Greek 10yrs are in the teens).

More likely, Gross has paid the top: by the time he reached 7.1yrs, 10yrs were 1.75% and my guess is that it was just him buying.

If yields keep on selling off, his fund’s performance will slip even further, and he’ll be forced to sell Treasuries in order to pay client redemptions — which will risk setting off a nasty spiral.


  1. I think the Fed is behind the curve so 10-year yields will fall below 1.75% within the next 3-6 months. Despite some slightly better recent data, I have no reason for doubting the ECRI’s call that a US recession is now inevitable in the near term. So Gross could make money, but I reckon buying Treasuries now would be a much better trade.

    1. I will take the other side of that trade.

      The ECRI may well be correct, but even a recession won’t necessarily keep yields low. Look at the 200bps sell off in H1 2009, despite qe1.

      1. Ricardo, you are dealing here with a follower of Sumner and I think he would say that it was QE1 (and 2) that caused yields to rise because they were effective in making investors believe the economy would improve. So given that QE3 seems a way off, I am prepared to bet that yields will fall below 1.75% before QE3 is announced and yields start to rise again. How about $100 to a preferred charity based on whether I am right by 31 March 2012?

        1. I understood this to mean that if yields are below 1.75% i will pay. I will post the reciept – whomever pays.

          Sent from my iPad

  2. Just to be clear – I am betting that the US 10 year treasury yield will fall below 1.75% at some stage before (or on) US close of trading on 31 March 2012 (not necessarily that it will be below 1.75% on that day). If it doesn’t, I will pay. You better hope that I win, Ricardo, so you can maintain your anonymity!

Comments are closed.