Bernanke suddenly no friend to big bond funds

Thu Jun 20, 2013 4:37pm EDT
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By Jennifer Ablan and David Randall

NEW YORK (Reuters) - Ben Bernanke, the central bank chief whose massive stimulus program drove bond yields to historical lows and minted a mountain of profit for fixed-income funds along the way, is now the arch nemesis of bond mavens.

It doesn't matter whether it's a "govvies" guy focused on Treasury debt or a junk bond junkie devoted to high-yield corporate bonds. The losses inflicted across all fixed-income assets since Bernanke signaled on May 22 that the Fed could soon dial back its $85 billion a month in bond purchases have been deep: $406 billion of cumulative losses, according to Bank of America/Merrill Lynch Fixed Income Indexes data.

"It has been a tough month after a rough May for a lot of investors, but mostly for the bond crowd," said John Brynjolfsson, chief investment officer of hedge fund Armored Wolf.

The downward spiral accelerated on Wednesday when Bernanke said the Fed now views the U.S. economy as strong enough to consider reducing bond purchases by year end and ending them entirely by the middle of next year.

The 10-year Treasury note yield climbed 46 basis points during May and has risen another 28 basis points so far in June. The yield hit 2.47 percent in overnight trading Thursday, its highest level since August 2011. Yields move inversely to the price of bonds.

The sell-off comes after investors have piled into bond funds. Investors added $257.8 billion to bond funds in 2012, according to Lipper, and have invested another $102.8 billion since the start of the year, dwarfing the roughly $33 billion invested in bond funds in 2008.

"The big question is: Is this a short-term or a whole re-pricing?" said Marc Lasry, co-founder of the $12 billion distressed debt firm Avenue Capital. "Right now it is too early to tell. We need to wait a little while, about two weeks" to get a better picture of whether the sell-off is a more permanent correction.

BOND KING'S 'GUT FEELING'   Continued...

U.S.Federal Reserve Chairman Ben Bernanke addresses a news conference following the Fed's two-day policy meeting at the Federal Reserve in Washington, June 19, 2013. REUTERS/Jason Reed