Bond market bulls thumb noses at Pimco Return Fund's Gross

New Jersey: Five months ago Bill Gross, who runs the world's biggest mutual fund at Pacific Investment Management, declared that the 30-year bull market in fixed-income securities was over.

Nobody questioned him. After all, Gross's Pimco Total Return Fund has been successful enough to attract $239 billion (Dh877 billion). No one paid much attention either.

Since Gross uttered his warning, US government and corporate bonds have remained in demand. The yield on the benchmark 10-year US Treasury note has dropped to about 2.5 per cent from 3.9 per cent in late March.

Rising prices of the government's debt helped investors in all Treasuries earn a return of 4.7 per cent in the second quarter and another half per cent in July, according to an index by Bank of America Merrill Lynch.

While Gross may be right for the long run, recent headlines have accelerated the bull run in bonds.

Investors fret that the economy is stalling again and that high unemployment will persist. That might mean another recession and a continued near-zero interest rates, which would bolster bond prices.

US bonds benefit from what seems a contradiction. Investors worry that the massive debts of European governments make their bonds risky. So what do they do? They buy Treasuries, though the US debt burden is no less troublesome. Perhaps it's the best of the worst.

Bonds have become the investment of choice because stock price declines have been so brutal. Investors who lived through the dot-com crash and the credit-crunch debacle now get whiplashed by flash-speed computer trading that dominates today's market.

The Standard & Poor's 500 Index has dropped more than 5 per cent so far this year.

Bonds are attracting small investors who put money in mutual funds as well as big-timers such as pension funds.

In the 30 months ended in June, bond mutual funds received $559 billion in new investments, while mutual funds investing in US stocks lost $209 billion, according to the industry's trade group, the Investment Company Institute.

Fund managers now encourage their customers to swing the pendulum back toward stocks.

These managers are concerned about their fees: On a dollar- weighted basis, stock funds on average collect 76 cents in fees for each $100 invested compared with 61 cents at bond funds, according to Lipper, a mutual-fund research firm.

Bond rush

The rush into bonds clearly has gone too far. Prices have little room to gain more with interest rates at historical lows. The Federal Reserve's key rate for overnight loans among banks is zero to 0.25 per cent. The 30-year Treasury bond yield is about 3.6 per cent.

Many people who've come to bonds only recently may eventually see greater returns from stocks. Sober investors may have second thoughts about the safety of Treasuries if the US can't curb its appetite for debt.