Don’t Sell Your Soul for Yield, Pimco’s Simon Says; “The road to hell is paved with positive carry”
June 5, 2013 Leave a comment
Jun 3, 2013
Don’t Sell Your Soul for Yield, Pimco’s Simon Says
By Al Yoon
Eking out a little bit of extra yield might be the death knell for an investment manager. That sums up some parting words from Scott Simon as he approached his May 31 retirement after three decades of mortgage-backed securities trading and investing, including the last 13-and-a-half years at bond fund giant Pacific Investment Management Co. Buying bonds for their yield, or “carry” over and above the cost of buying them is not the best approach if investors are sacrificing attention to the bonds’ prices, Simon said. Investors too often mistakenly focus on buying bonds for the interest they pay rather than their fundamental value, particularly after a period of prolonged low interest rates when buyers become starved for higher yields, he said.
“The road to hell is paved with positive carry,” he said, repeating a mantra that traders say he’s proffered before.The performance of mortgage-backed securities over the past month of May is a case-in-point, Simon said as he watched the market grind lower in his final days last month as Pimco’s mortgage- and asset-backed bond chief.
Increasing concern that the Fed would throttle back its purchases of mortgage bonds sent bond yields soaring and the price of Fannie Mae FNMA -7.59% 3% MBS tumbling to 100.53 cents on the dollar from 104.76 cents. An index of MBS lost 3.11% in the month, the most dramatic decline since its inception in January 2012. The broader index of fixed-rate MBS lost 1.56% in the month in its worst performance in more than nine years, according to Barclays BARC.LN -0.75% indexes.
Pimco’s flagship Total Return Fund was hit harder than most other large bond investment funds in May, but Simon wouldn’t say exactly how Pimco was positioned in MBS.
“Rates were incredibly low and MBS were incredibly expensive relative to Treasurys,” he said. “Plus, people kept saying that the Fed is going to keep buying them and QE [quantitative easing] is going to go on forever.”
For those heavy with hard-hit bonds, he added: “You sort of sold your soul for carry.”
MBS are still expensive, but given the price drops, they can “do really well” if Treasurys stop going down and chatter about an early end to the Fed’s bond buying subsides, he said.
This week, however, Simon is in his retirement. At age 52, he has promised to wean himself from MBS and turn his attention to a life of travel, philanthropy and other pleasures that he says he couldn’t envision while putting himself through Stanford as a farm worker and dish washer.
“I’ve been unbelievably lucky. Crazy lucky,” he said.
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