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