When it comes to the debt markets, Pacific Investment Management Bill Gross is considered by many to be the authority on bonds. The manager oversees nearly $1.2 trillion worth of assets at PIMCO, including his signature PIMCO Total Return (PTTAX). That fund is one of the largest mutual funds in the world. So when he makes a move tweaking his portfolios, its pays for regular investors to heed his advice. Recently, the bond guru has been increasing the $268 billion fund's exposure to an asset class many investors have been abandoning- U.S. Treasury bonds.
For retail investors, Bill Gross’s confidence in the sector could signal that it’s not time to get rid of their treasury holdings just yet.
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“Aren't the Titanic”
As Federal Reserve Chairman Ben Bernanke began his “taper tantrum” this past May and investors started to seriously worrying about when the Fed would end their quantitative easing programs, yields on Treasury bonds rose to 2.65%. That’s its highest level since August 2011 and Bill Gross was buying. According to data on PIMCO’s website, proportion of U.S. government debt in the fund rose to 38% this past June.
Gross predicts that many investors ran for cover too soon on the Bernanke taper talk and that the wind-down of bond purchases won't happen as quickly as the market is currently predicting. That’s because there’s still too many headwinds facing the U.S. economy. These issues include the nation’s still stubbornly high 7.6% unemployment rate, low inflation rate and the recent hike to mortgage rates. Housing remains the economy’s lynchpin and those rising mortgage rates will put a damper on the recovery in consumer spending and home sales/construction. Overall, the Bond King predicts that Bernanke won’t make a move on interest rates until unemployment falls to 6.5% and inflation tops 2%. It could be a while till we hit those levels.
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Ultimately, the Fed won’t raise interest rates for at least another year or two and treasury yields have overshot and will dip back to 2.2%. Gross believes that now could be the best time to add or re-buy sold out treasury positions. While investors won’t see huge returns, the 3 to 5% could be one of the best risk free bets in the market today.
Following Gross’s Lead
With the Bond King once predicting decent returns for treasuries and buying them once again, investors may want to wade back into the waters and follow the guru’s advice. While broad-based and popular bond ETFs like Vanguard Total Bond Market ETF (NYSE:BND) do include hefty treasury exposure, they aren’t perfect plays on government debt as they do include corporate and agency exposure. Luckily, there are plenty of ways to bet directly on treasury bonds via ETFs.
A perfect way could be through the iShares Barclays 7-10 Year Treasury (NYSE:IEF). The $4.3 billion dollar fund spreads its assets among 23 different treasury bonds with remaining maturities between 7 and 10 years. That gives the fund a weighted average duration of around 8.35 years and yield of 2.16%. The fund is a cheap option as well, with IEF’s expenses running at a rock bottom 0.15%. Likewise, both the SPDR Barclays Intermediate Term Treasury (NYSE:ITE) and Vanguard Intermediate-Term Government Bond Index ETF (NASDAQ:VGIT) can be used to intermediate treasury bonds.
Investors looking for the biggest bang for their treasury buck may want look at the ProShares Ultra 7-10 Year Treasury (NYSE:UST). The fund is essentially a leveraged version of IEF and tracks twice the daily performance of the Barclays Capital U.S. 7-10 Year Treasury Index. That will help it magnify any gains that treasuries see over the next few years if Gross is right. In terms of cumulative performance, UST has trampled its non-leveraged counterparts and justified its 0.95% expense ratio.
Finally, the best way to follow Bill Gross’s advice is to bet on the bond king himself. The PIMCO Total Return ETF (NASDAQ:BOND) is run by Gross and features some of his best ideas. The $4.2 billion fund has 928 different holdings, with the bulk of them are in U.S. Treasuries. Overall, BOND is the perfect way to trade off of Gross’s best ideas and newfound love of treasury bonds.
The Bottom Line
Given his impressive track record, when PIMCO’s Bill Gross speaks, investors should listen. The Bond King knows what he is talking about. This time he’s advising buying U.S. treasuries as they have sold off too much in the wake of the Fed’s taper news. The previous exchange traded funds offer an easy way to add a slice of the bonds to a portfolio.