World's largest bond fund suffers $41B in withdrawals

The world's largest bond fund, PIMCO's Total Return Fund, registered its fourth straight month of heavy cash outflows in August, with $7.7 billion US of withdrawals bringing net outflows since April to $41 billion as investors pull out of the bond market in anticipation of the winding-down of the U.S. Federal Reserve's bond-buying program.

PIMCO's Total Return Fund fund victim of fear over end to U.S. Federal Reserve bond-buying program

Bill Gross is manager of the PIMCO Total Return Fund, which lost $41 billion US over the last four months. (Pacific Investment Management Co./Associated Press)

The world's largest bond fund, PIMCO's Total Return Fund., registered its fourth straight month of heavy cash outflows in August, with $7.7 billion US of withdrawals bringing net withdrawals since April to $41 billion.

Investors are pulling out of the bond market in anticipation of the winding-down of the U.S. Federal Reserve's bond-buying program.

The fund, managed by Bill Gross of the Newport Beah, Calif.-based Pacific Investment Management Co., saw its assets drop to an estimated $251 billion by the end of August, according to data supplied by the financial research firm Morningstar and reported in the financial press.

The August outflows followed similar withdrawals in July, which saw investors pulls $7.5 billion out of the fund, Reuters news agency reported.

Investors pull out of U.S. bonds

Investors have been pulling of the bond market ever since Fed chairman Ben Bernanke announced in June that if economic indicators continued to improve, the central bank would wind down its economic stimulus program by next year.

In what is known as quantitative easing, the Fed has been purchasing $85 billion in U.S. Treasury bonds and mortgage-backed securities each month as a way of strengthening the U.S. economy and offsetting the effects of budget tightening and austerity measures.

Reuters reported that according to data from TrimTabs, investors pulled $39.5 billion from bond mutual funds and exchange-traded funds in August alone, the third-highest outflow on record. The June outflows of $69.1 billion were the highest reported. 

Investors will be looking for a clearer sign of when the Fed will begin its pullback at the next meeting of the bank's board of governors, set for Sept. 17-18.

Yields rising

Anxiety over the Fed withdrawal have pushed up bond yields, which move in the opposite direction to prices. The yield on the benchmark 10-year U.S. Treasury bond rose to just shy of three per cent (2.98 per cent) on Thursday, its highest level since July 2011.

Gross himself recently addressed the large outflows, or "rush for the exits," from the bond market in a September note to investors titled Seventh Inning Stretch.

"Debt-laden economies with near-zero-bound interest rates became victims of their own excess, a condition that was more difficult to stabilize cyclically because Big Government and Big Bank had reached limits, and private market investors with huge portfolios of their own began to leave the ballpark early," Gross wrote.

"Why stick around if your team is down by seven runs with only a few innings left? Why invest in financial or real assets if bond prices could only go down, and/or stock prices could no longer be pumped up via the artificial steroids of QE (quantitative easing)?"

Given the anticipated end to the Fed's bond-buying program, Gross advised investors to direct their money into front-end, or shorter-term, bonds, rather than stocks, which, he said, could be at risk "without Big Government deficits and Big Bank check writing and with the advancing risks posed by Big Regulation."