NEW YORK, Feb 12 (Reuters) - The Pimco Total Return Fund, the world’s largest bond fund, has moved its exposure into longer maturing fixed-income securities, reflecting the belief that the Federal Reserve will be slow to raise interest rates, one of the fund’s co-managers said.
”We have moved our yield curve exposure out of what we think is the significantly overpriced front end and focused our exposure in seven- to 10-year maturities, Scott Mather said in his latest research note.
Mather, also chief investment officer of U.S. Core Strategies at Pacific Investment Management Co, added that certain sectors are undervalued including inflation-linked securities.
“In the TIPS (Treasury Inflation-Protected Securities) market, for example, 10-year breakeven inflation has been priced as low as 1.5 percent recently, which reflects very low, and we think unrealistic, 10-year inflation expectations,” he said in the note posted on the firm’s website.
“Once oil prices have bottomed and headline inflation turns back up, we think the market will focus on TIPS as an underpriced asset class.”
The Pimco Total Return Fund has been closely watched as investors have pulled $68 billion of net cash in the four months since the end of September. On Sept. 26, Bill Gross, previously the manager of Pimco Total Return, abruptly resigned from the Newport Beach, Calif. firm he co-founded.
For all of 2014, investors pulled $150 billion from Pimco’s U.S. open-end mutual funds, according to Morningstar data.
Mather said he has not needed to make adjustments to how he and his team manage their strategy against the backdrop of market volatility and client outflows.
“Whether there are inflows or outflows, every day we ensure that the strategy maintains the target exposures we have set for the portfolio in each fixed income sector,” he said. “Flows are not a reason to change the way we manage the strategy.”
Mather said the U.S. dollar is likely at the start of a “long-lasting, upward trend,” though it may experience volatility along the way.
He said not only did the dollar rise from relatively cheap levels, but it has a significant tailwind given divergences in the global economy.
“In general, more global divergence, more volatility and more overshoots will create great opportunities for active fixed income investors,” Mather said. “But a good defense is required as monetary policy is likely to represent a headwind for all financial assets instead of the steady tailwind it has been for the past several years.” (Reporting By Jennifer Ablan; Editing by Christian Plumb)