PIMCO, DoubleLine, TCW big winners from Fed’s QE3 assault

NEW YORK, Thu Sep 20, 2012 – The Federal Reserve’s move to stimulate the economy by buying mortgage securities is proving to be manna from heaven for three of the biggest players in the bond fund business: Pacific Investment Management Company, DoubleLine Capital and TCW.

The three investment firms all manage mutual funds that loaded up on mortgage-backed securities well before the Fed announced last Thursday that it would start buying $40 billion in government-backed mortgage debt each month until there’s a sharp improvement in the job market.

With U.S. Treasury yields at extraordinary low levels, bond investors like TCW, PIMCO and DoubleLine have migrated toward mortgage-backed securities as those securities not only provide higher yields but they perform well when interest rates are stable.

It is TCW’s flagship fund that is outperforming the ones managed by PIMCO co-founder Bill Gross and DoubleLine founder Jeffrey Gundlach – the two money managers seen as the reigning kings of the bond investing world.

The $7.4 billion TCW Total Return Bond Fund, which has more than 80 percent of its assets invested in mortgage-backed securities, is up 10.68 percent for the year.

The TCW fund is besting the 8.61 percent year-to-date return for the $272.5 billion PIMCO Total Return Fund – the world’s biggest bond fund – and the 7.89 percent return posted by the $32 billion DoubleLine Total Return Bond Fund.

Fed not yet decided on more easing, Dudley says

MELVILLE, N.Y., Mon Mar 19, 2012 – The Federal Reserve has not yet decided whether to embark on a third round of quantitative easing, or QE3, though it remains an option, an influential Fed official said on Monday.

New York Fed President William Dudley, a close ally of Chairman Ben Bernanke, painted a mixed picture of the economy, tempering recent signs the recovery is gaining speed with warnings that it could just as easily stall out.

“Nothing has been decided,” he said of QE3, in which the Fed would make large-scale asset purchases in an attempt to lower rates and give the economy another controversial shot of adrenaline.

“It all depends on how the economy evolves,” Dudley added. “It’s about costs and benefits, and if we get to a point where we think the benefits of another program of QE outweighs the costs, then we’ll certainly do so.”

Dudley, like Bernanke in recent testimony to Congress, defended the central bank’s ultra-easy policy stance but seemed to temper any talk of exactly what more it was prepared to do to help along the recovery and ratchet down the unemployment rate, which remains high 8.3 percent.

After a meeting in Washington last week, the Fed’s policy-setting committee made no policy change and gave few clues how it interpreted some recent jobs growth, coupled as it has been with worries over GDP growth and oil price-driven inflation.

Dudley said U.S. economic activity is not yet strong or sustained enough to put a dent in the economy’s “slack,” which is keeping many Americans out of work some three years after the deep recession ended.

“The incoming data on the U.S. economy has been a bit more upbeat of late, suggesting that the recovery may be finally establishing a somewhat firmer footing,” Dudley said, citing expanding GDP late last year, payrolls, sales of motor vehicles, and somewhat firmer housing starts.

“While these developments are certainly encouraging, it is far too soon to conclude that we are out of the woods,” Dudley, a policy dove with a permanent vote on the Fed’s policy-setting committee, told a gathering of the Long Island Association.

Pimco chief El-Erian gives ‘low probability’ of QE3 stimulus

NEW YORK ― Pimco chief Mohamed El-Erian on Thursday put low odds on a third round of U.S. monetary stimulus unless there is a “major further deterioration” in the U.S. economic outlook.

“We would assign a low probability (at) this stage to QE3 given the general recognition that the forward-looking cost-benefit analysis has shifted away from the potential benefits and toward greater costs and risk,” El-Erian, co-chief investment officer of Pimco, said in a live blogging question and answer session on Reuters.com.

“Therefore, it would take a major further deterioration in the economic outlook, combined with a willingness by the Fed to take greater reputational and political risks,” he said.

Pimco, which manages $1.2 trillion in assets, is home to the world’s largest bond fund.

El-Erian’s outlook follows the June 22 forecast of fellow Pimco Co-Chief Investment Officer Bill Gross that the Federal Reserve would hint at a third round of bond purchases, or QE3, at the Jackson Hole meeting in August.

Also on June 22, the U.S. Federal Reserve cut its forecast range for U.S. economic growth to 2.7-2.9 percent from 3.1-3.3 percent. It offered no hint it would offer further monetary support via quantitative easing.

At the end of June its quantitative easing program, which consisted of purchasing $600 billion worth of U.S. debt, also known as QE2, expired.

The row in Washington over the United States’ debt ceiling and a potential downgrade to its AAA credit rating has drawn global attention to the health of the economy and whether it needs more government help.

The three major credit rating agencies have all put the U.S. government on warning that it faces a downgrade if debt payments are missed come August 2, when the U.S. Treasury says it will have exhausted its financial resources.

The U.S. Congress has the authority to raise the country’s borrowing limit.

El-Erian said a cut to the U.S. credit rating would be disruptive to a “global economy that is constructed with the U.S. at its core. Or to be even more blunt, the U.S. is the core of the core.”

If the rating were cut, global financial markets would become more volatile with the risk of major re-allocations of capital both within and across borders, El-Erian said.