Sometimes, the financial markets give us a second opportunity
to make money or avoid a loss.
That's exactly what's happening today.
Back in May, Fed Chairman Ben Bernanke announced "tapering."
He was referring to a coming reduction of the $85 billion monthly
bond-buying program known as QE3.
Since May, the yields on Treasury bonds have surged 80%. For
example, the 10-Year Treasury's yield jumped from 1.66% on May 1
to as high as 2.98% in early September.
Bond values fell as a result.
The Pimco Total Return (
is the biggest bond mutual fund in the world. It dropped
7.2% in the same period. That's not a huge decline, but it's a
decent loss for investors in a bond fund.
That's particularly true when you consider that the fund
yields 3.46%. At that yield, it'll take investors two years to
recoup their losses from the move in interest rates.
But since early September, an interesting thing has
happened in the world of bonds: yields have been
Since its high, the U.S. Treasury 10-year yield has dropped
11%. It now stands at 2.65%.
That's because the Fed has delayed tapering. At last
week's FOMC meeting, the Fed announced no changes to the
The slow economic recovery is largely the reason. And
the U.S. government shutdown and debt ceiling debate certainly
aren't helping the country's economic growth or unemployment
The September jobs data was worse than expected, with only
148,000 jobs added. That was about 20% below the average
monthly number of new jobs. With the U.S. unemployment rate
far above "healthy" levels at 7.2%, the Fed remains hesitant to
curb economic growth by raising interest rates.
As a result, bond prices have recovered
of their losses. For example, the Pimco Total Return has
recovered nearly half of its earlier losses.
I own Pimco Total Return. Managed by billionaire fund
manager and bond king Bill Gross, Pimco has historically been an
amazing performer. Over the last five years, the fund has
delivered 8% annual returns. That was enough to beat the
benchmark by 2%. For a fund with $250 billion in assets,
that performance is impressive.
Yet this year, the fund is down 1.5%. That performance -
coupled with concerns about a coming bond bubble - has encouraged
some investors to sell the fund. September was the fifth
consecutive month of outflows. In total, nearly $29 billion or
10% of assets have been pulled out of the fund by
I've owned Pimco since early 2009 and it's been a consistent
fixed income performer. Yet ever since the Fed's tapering
plans were announced, I've been looking for a good time to reduce
my exposure to this fund.
The recent rebound for bonds provides that opportunity. Bond
yields have fallen, and values have risen. And that makes
now the best time to sell bonds since June.
Yesterday, I decided to cash in on the recent rebound for
bonds. I view this as a second chance to cash out before
the Fed actually begins tapering its bond-buying program.
When it does, look for bond yields to rise, and values to fall
I don't know if tapering will happen on Bernanke's watch
before the end of 2013 or in 2014 once Janet Yellen takes over as
the Federal Reserve chairman. Either way, we know that QE3
will come to an end. And we know that bond owners will suffer
losses along the way.
While I wish I had cashed out of Pimco sooner, the market is
giving us a second chance to sell the fund and book a
profit. If you own Pimco Total Return or other bond funds,
you may want to consider doing the same.