Taxable bond funds pulled a sharp U-turn in the second
"If there was ever a tale of two halves, this has been it,"
said Rick Rieder. The chief investment officer of fundamental
fixed income portfolios for BlackRock was referring to taxable
bond fund performance in Q2.
Taxables were on a run through early May. "Since then,
especially since Fed Chairman Bernanke's speech, it was
downhill," Rieder said.
On June 19 the Federal Reserve chairman signaled that the
central bank would trim its bond buys if the economy grows as
Shareholders dumped an estimated $81.4 billion of all types of
bond mutual funds and
last month. That nearly doubled the prior single-month record of
$42 billion, in October 2008.
"I don't remember a faster 180-degree turn than what happened
in the past two weeks," said Rieder, who also is a manager of
$6.4 billion BlackRock Strategic Income Opportunities .
The sell-off was also fueled by volatility in Japan, slowing
economic growth in emerging markets and signs of a slowdown in
China, Rieder said.
By the end of June, taxables had lost 1.98% for the month and
2.22% for Q2, based on preliminary Lipper Inc. data. That was
their seventh-worst quarter in 25 years.
Treasury funds' 3.68% Q2 loss was their eighth worst. They
lost 2.11% last month alone.
And Treasuries weren't even the worst Q2 performers. TIPS
funds tumbled 6.61%. Emerging markets debt funds plunged
The only group to avoid a Q2 setback was one with little rate
sensitivity. Loan participation funds inched up 0.11%.
Steeper Yield Curve
The yield curve steepened as the yield on 10-year Treasuries
rose 62 basis points to 2.49%, while the yield on two-year notes
rose 11 basis points to 0.36%. Ten-year T-notes had gone as high
as 2.60% on June 25, their highest since August 2011.
In the closing days of Q2, the Fed went into damage-control
mode, emphasizing that it would not trim its stimulus until the
economy is strong enough.
Rieder expects the yield on 10-year Treasuries to rise no
higher than 3% by year end. "The market has gotten ahead of the
Fed," he said, noting that the Fed insists it is not ready to
raise interest rates.
Rieder owned a floating rate bond issued by Hilton Worldwide,
which matures in about 2-1/2 years and is unrated. The
Libor-plus-230-basis-points coupon steps up to Libor-plus-330 in
November and Libor-plus-380 a year later.
"The short duration and floating rate protect us against
rising rates," Rieder said. "It gets you additional yield because
there is no rating. It's low volatility. And it's tethered to
real estate, which should have a tail wind of growth."
The bond started Q2 at 100.59, which was Libor-plus-345, and
ended at 100.13, Libor-plus-368.
Tax-exempts had a worse Q2, losing 3.32% after plummeting
3.19% last month alone.
The muni sell-off was orderly for several weeks until
Bernanke's June 19 comments made investors think bond-buy
tapering was coming sooner than expected, said Geoffrey
Schechter, who manages or co-manages five MFS funds with $10
billion in assets.
Investors simply did not want to be stuck with older munis if
rates were about to rise, he added.
Still, Schechter expects the sell-off to become orderly again
as investors see that the Fed is not beginning its tapering all
Schechter owned a 5% coupon Houston water and sewer bond,
which reflected Q2's volatility. The price of the bond, due
November 2036 and rated AA by S&P, began Q2 at 112.74, hit a
low of 103.38 on June 25, and closed Q2 at 105.52, for a return
of -5.21% vs. -4.35% for the Barclays long-bond index.