By Min Zeng 

Prices on inflation-linked Treasury bonds are slipping, in part reflecting concerns that Pacific Investment Management Co. may have to sell some of its large holdings of these securities to meet redemptions following the exit of Bill Gross.

About 10% of the $222 billion Pimco Total Return Fund, which was run by Mr. Gross until Friday, was invested in Treasury inflation-protected securities, or TIPS, according to Pimco data as of June 30.

Worries that a large supply of TIPS could flood the market prompted selling by fund managers and hedge funds, bond traders said. Investors have pulled billions of dollars from Pimco, one of the world's biggest asset managers, since the Mr. Gross's abrupt departure for a rival firm.

"The unknown is the worst for an investor so you need to be cautious," said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading in New York at Deutsche Bank AG's private wealth-management unit. "At the moment, the outlook for TIPS is not good, both fundamentally and technically."

Pimco didn't immediately respond to requests for comment.

Even before the news about Mr. Gross, TIPS were faltering amid subdued core U.S. inflation, a decline in commodities prices and anticipation of an interest-rate increase by the Federal Reserve next year, traders said.

The recent moves in the TIPS market are an example of the ripple effects that have accompanied the management changes at Pimco. Because the Pimco Total Return has exposure to broad swaths of global credit markets, Treasury bonds, Spanish and Italian government bonds, eurodollar futures and corporate bonds issued by low-rated companies have also been weighed down by the news, traders and investors say.

On Tuesday, the price of TIPS that mature in January 2029 fell, pushing the yield on these bonds to a two-week high of 0.855%. On Thursday, before the announcement of Mr. Gross's departure, the yield on these TIPS was 0.764%. Yields rise as prices fall.

Mr. Gross championed TIPS on the belief that the Federal Reserve's monetary stimulus following the 2008 financial crisis would stoke inflation over the longer term. Principal repayments on TIPS are indexed to inflation, although the bonds usually offer lower interest payments than standard Treasurys. TIPS are popular financial instruments to hedge against inflation as their principal repayments rise once inflation breaches a certain threshold.

The Pimco Total Return Fund held $3.8 billion of January 2029 TIPS at the end of June. Six TIPS ranked among the fund's top 20 holdings.

Through Monday, TIPS posted a total return, which includes price changes and interest payments, of negative 2.4% in September, according to Barclays. TIPS underperformed the broader Treasury market.

Year-to-date, TIPS have returned 3.77%, compared with a 3.15% gain in Treasury bonds.

Mutual funds and exchange-traded funds that focus on buying TIPS, a category that doesn't include the Pimco Total Return Fund, saw net outflows of $573 million this month through Sept. 24, according to fund tracker Lipper. September is on track to be the first month of outflows since May.

Traders say concerns relating to Pimco have had a relatively big impact on TIPS because the market for TIPS is much smaller than for regular Treasury bonds.

About $1.5 billion of TIPS are traded every day, compared with $150 billion to $200 billion for regular Treasury bonds, according to traders and strategists.

"One of the most vulnerable sectors of the bond market is the TIPS market," said James Sarni, senior managing partner at Payden & Rygel in Los Angeles, which manages about $85 billion. It's "inherently more of a technically driven market and this kind of an announcement [about Mr. Gross] can temporarily exacerbate price volatility in thinly traded markets such as this."

Mr. Sarni declined to comment on his Treasury and TIPS holdings.

Some investors say the selloff makes TIPS attractive.

"For long-term investors, this may present a good buying opportunity," said Zach Pandl, portfolio manager and strategist for Columbia Management, which has $363 billion assets under management.

Mr. Pandl said he expects that both U.S. growth and inflation will accelerate, and that policy makers in the eurozone will "turn the economy and very low inflation around." Either factor would bolster the appeal of TIPS, he said.

Write to Min Zeng at min.zeng@wsj.com

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