A cruel, cruel summer for U.S. credit funds

Fri Jul 5, 2013 7:36pm EDT
 
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By Katya Wachtel and Sam Forgione

NEW YORK (Reuters) - It's shaping up to be a brutal summer for bond investors as the bloodbath in the U.S. credit market shows no signs of letting up, even as nearly $80 billion has already been wiped from funds.

The past six weeks have been humbling for well-known fund managers including Bill Gross of PIMCO, Jeffrey Gundlach of DoubleLine Capital and Ray Dalio of Bridgewater Associates - all victims of a violent sell-off in U.S. Treasuries, mortgage-backed securities or inflation-protected bonds.

On Friday, the yield on the benchmark 10-year Treasury note touched 2.73 percent, gaining more than a full percentage point since early May, as better-than-expected U.S. jobs data fanned speculation that the Federal Reserve could begin to scale back its $85 billion-a-month bond-buying stimulus this fall.

While some bond managers are putting on a brave face, saying the market's broad-based sell-off is overdone, others recall the sharp rise in interest rates two decades ago that wreaked havoc on some bond portfolios. In June alone, bond mutual funds and exchange-traded funds lost a record $79.8 billion, according to TrimTabs Investment Research. That data does not include losses incurred by hedge funds.

"Five years of bond investors' income wiped out in a single quarter is tough. Not knowing if next quarter will reverse that, or repeat it is tougher," said John Brynjolfsson, managing director of global macro hedge fund Armored Wolf LLC.

Friday's jobs report cemented market expectations for the Fed to start winding down its massive stimulus program as early as September.

With Fed Chairman Ben Bernanke warning that the central bank will not keep buying Treasuries and mortgage securities forever, the yield on the 10-year Treasury note has surged 110 basis points since its low close of 1.62 percent on May 2 and the yield on some 30-year agency mortgage-backed securities has risen about 1 percentage point to about 3.71 percent.

John Paulson's $5.8 billion credit fund at his Paulson & Co firm lost 3.8 percent in June, according to an investor letter. The fund is still up 11.7 percent for the year.   Continued...

 
Pacific Investment Management (PIMCO) founder and co-chief investment officer Bill Gross plays golf on the first hole at Pebble Beach Golf Links before the start of the AT&T Pebble Beach Pro-Am in Pebble Beach, California, February 8, 2012. REUTERS/Robert Galbraith