Wednesday, August 5, 2009

Fixed income funds show huge return dispersion

Some readers have asked why TLT (iShares 20+ year Treasury Bond ETF) is down 21% year-to-date, even when interest is included. A treasury only fund down this much? In six months? Whoever said treasuries are a "safe" investment?

Has the long bond gotten this much of a beating? Actually it has. The long bond duration was roughtly 13 years (at the beginning of the year) and the yield has moved up by 1.78% (from 2.68% to 4.46%). 1.78% x 13 = 23% loss. Add some interest to that and we are consistent with the TLT move.

Corporate bonds did much better. The investment grade bond ETF LQD is up 4.4% for the year, corresponding to rise in rates and drop in spreads. A really impressive performance came from Bill Gross in the Pimco Total Return Fund (PTTRX), which is up 8.3%. Trading agencies, treasuries, and corporate bonds, these guys were able to rotate in and out of paper to achieve a hedge fund-like return.

Disclosure: long PTTRX
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