Thu May 31, 2012 7:49pm EDT
By Sam Forgione
NEW YORK May 31 (Reuters) - Some of the world's biggest money managers, including PIMCO and Vanguard, have profited handsomely from the surprisingly steady drop in U.S. Treasury bond yields.
On Thursday, benchmark 10-year Treasuries yields fell to a historic low of 1.5326 percent, according to Tradeweb. The previous low was in November 1945 when yields ended that month at 1.55 percent.
Thirty-year Treasury bond yields briefly touched the lowest level since December 2008. The long bonds set a record low yield of 2.52 percent on Dec. 19, 2008.
It's become sport to declare the 30-year bull market in bonds over, and yet interest rates continue to fall in the United States and in other countries recognized as "safe havens," including Germany, the Netherlands, Japan and Switzerland.
Even the most astute players of the bond market have been blindsided by moves in Treasuries.
"I am amazed that anyone would pay these prices for long-maturing Treasury bonds," said Dan Fuss, vice chairman of Loomis Sayles, which oversees $172 billion in assets.
Risk aversion has overwhelmed the paltry yields paid out to investors.
Fear of a Greek exit from the euro zone and JPMorgan Chase & Co's unexpected $2 billion trading loss have ignited a rush out risky assets and into low-yielding Treasuries.
And with Europe in recession, China's economy slowing and hopes of robust U.S. growth fading, the global economy has simply become too weak to stoke significant inflation or justify higher interest rates.
A further decline in 10-year Treasury yields is "probably what to expect if things truly unravel in Greece," said Jeff Tjornehoj, head of Americas research for Lipper.
The biggest winner from the flight-to-quality trade is the PIMCO Extended Duration Institutional fund, which holds 97.49 percent of its assets in U.S. Treasuries.
It is the top performing fund among U.S. Treasury-focused funds and has a 7.098 percent return year-to-date, according to Morningstar, an investment research firm.
PIMCO's co-chief investment officer Bill Gross reiterated on Thursday that with depressed bond yields and a shrinking AAA-rated asset pool, Treasuries are still favored as one of the "clean dirty shirt" sovereigns.
The other U.S. Treasury-focused funds in Morningstar's top five include the Rydex Government Long Bond 1.2x Strategy-Investor Class with a year-to-date return of 6.87 percent, the Vanguard Extended Duration Treasury Index Institutional with a year-to-date return of 6.85 percent, the PIMCO Long-Term US Government Institutional with a year-to-date return of 6.85 percent, and the American Century Zero Coupon 2025 Investor Class with a year-to-date return of 5.92 percent.
All of those funds have earned returns of between 6.87 percent and 5.92 percent year-to-date and are slanted toward the longer end of the yield curve, according to Morningstar.
Two of the worst-performing U.S. Treasury-focused funds are the Dreyfus Short-Intermediate Government fund with a year-to-date return of -0.17 percent, and the Shelton Short-Term US Government Bond Direct fund with a year-to-date return of -0.13 percent. Both funds focus on short-term government bonds, according to Morningstar.
The Barclays Capital Treasury index, which rose 9.81 percent last year, is up 1.67 percent as of May 30.
U.S. Treasury-focused bond funds have had $20.46 billion of net cash inflows year-to-date--already outpacing the net inflows of all of 2011 of $17.25 billion in the same funds, according to fund-tracking firm EPFR Global.
The biggest amount of new cash so far this year into U.S. Treasury-focused funds has come in over the past five weeks, EPFR Global added.
"We've been in the long end of the market for a sustained period of time, and that's where the outperformance comes from," said Van Hoisington, president and chief investment officer of Hoisington Investment Management, which oversees more than $4.5 billion in assets.
The Wasatch-Hoisington US Treasury fund is the sixth-best performing U.S. government bond fund, with a 5.67 percent return year-to-date, according to Morningstar. Last year, the fund achieved a year-end return of 41.22 percent.
"It has been our belief that economic conditions are poor in the U.S. and they're even worse overseas. And generally, in the bond market, if you have the economic perspective correct, you generally will be correct on the direction of interest rates," Hoisington said.
These funds that hold out for flights to safety could see even higher returns, as some suggest that interest rates could fall further in response to fears surrounding euro-zone economies.
DoubleLine's CEO and CIO Jeffrey Gundlach, who called Spain's banking system "the most important factor du jour" in an interview, told Reuters: "Since the Spanish banking system's foundation is almost certain to deteriorate further, the markets' movements of recent weeks should continue until they elicit some form of aggressive response."
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