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Pimco's Big Sell-Off

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(Bloomberg) -- The big money is selling in the U.S. government debt market.

Pimco's Total Return Fund, the world’s largest bond fund with $117.4 billion in assets, has cut way back on its holdings of U.S. securities.

The Total Return Fund chopped government debt to 21.6% of assets in March from 35.3% in February, according to a post on Pimco’s website last week. Besides Treasuries, holdings in that category may also include related assets such as futures and agency bonds, the website shows.

Morgan Stanley chimed in with a report Sunday saying economic growth and inflation will send benchmark Treasury yields higher this year. And that means prices will fall.

U.S. 10-year yields will rise to 2.40% by year-end, according to Morgan Stanley, from around 1.95% on Monday. An investor who bought today would lose about 2% on a pre-tax basis if the forecast is accurate, according to data compiled by Bloomberg.

Pimco’s Total Return Fund has returned 5.2% in the past year, beating 83% of its competitors, according to data compiled by Bloomberg. While assets have declined from a peak of $293 billion in April 2013, it remains the biggest fixed-income fund after longtime manager Bill Gross left in September.


At Morgan Stanley, one of the 22 primary dealers that underwrite the U.S. debt, its bear-case outlook is for 10-year yields to rise to 3.20% in the first quarter.

“As growth recovers, so should inflation,” analysts including Matthew Hornbach, the head of global interest-rate Strategy in New York, wrote in the report.

The Federal Reserve will probably raise interest rates in December and extend the increases next year, with Treasuries continuing to push lower into 2016, the report said.

The outlook for inflation is climbing in the Treasury market, yet it’s still low.

The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 1.82 percentage points. It has risen from about 1.49 as recently as January. The average for the past decade is 2.15.

Most analysts predict losses in Treasuries, though the consensus call has already been wrong once this year, projecting bonds would fall in the first quarter when they rose.

The latest Bloomberg survey shows the 10-year yield will climb to 2.54% by Dec. 31.

Treasuries returned 1.8% in the first quarter and 6.2% in 2014, data compiled by Bloomberg show.

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