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.