(Bloomberg News) Mutual funds in the U.S. that focus on bonds have the highest percentage of their assets in cash since 2008, which may temper a rise in yields from about record lows as managers put that money to work.
Managers are sitting on about $243 billion of cash and short-term securities, or about 9.79 percent of assets, after investors plowed $90 billion into taxable bond funds this year, according to Morningstar Inc. and the Investment Company Institute in Washington. That's up from 9.1 percent last year and above the average of 8.43 percent in the decade ended 2010.
Few managers see scope for yields on everything from Treasuries to junk bonds to fall, and many said they are poised to redeploy the cash into bonds as they rise because the economy isn't strong enough to generate faster inflation or cause the Federal Reserve to raise interest rates this year. Each time the yield on the benchmark 10-year Treasury approached 4 percent in the past three years, investors drove it lower. It ended at 2.91 percent last week.
"We are looking for a more severe down move in prices, for a better level to buy," said Jeffrey Gundlach, whose $8.51 billion DoubleLine Total Return Bond Fund beat 99 percent of its peers in the last year by returning 13 percent, according to data compiled by Bloomberg. "To hold cash you have to have a conviction that prices of something that you'd otherwise own will go down, which is exactly what happened in June."
Buying Opportunity
Gundlach, the chief executive officer of Los Angeles-based DoubleLine Capital Inc., said in a telephone interview that he has 10 percent of the fund's assets in cash, about five times what it usually holds. He views a move in the 10-year Treasury yield above 3.5 percent as a buying opportunity.
Bonds rallied last week even as Moody's Investors Service and Standard & Poor's put the U.S.'s AAA credit rating on review for downgrade as lawmakers dicker over raising the nation's $14.3 trillion debt ceiling and cutting the budget deficit.
Treasuries extended last week's advance, pushing the yield on the benchmark 10-year note one basis point lower to 2.90 percent, as of 11:12 a.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent security due May 2021 rose 3/32, or $94 cents per $1,000 face amount, to 101 30/32.
Last week's auctions of three-, 10- and 30-year Treasuries all attracted higher-than-average demand. The bid-to-cover ratio on the $13 billion in bonds, which gauges demand by comparing total bids with the amount offered, was 2.80, above the average of 2.64 at the prior 10 sales.
'Put to Work'
"The market is saying that regardless of what happens, there is money to be put to work in all the ultra high-grade sovereigns," Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee, said. "There's cash on the sidelines from profit-taking in the second quarter. There's money coming in from global investors."