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Bond King Bill Gross cut back on U.S. Treasuries and mortgage-backed securities in his flagship PIMCO Total Return Fund during March, as Treasury bond prices pulled back on the threat of interest rates rising sooner than had been previously expected.

Gross cut Total Returns’ (TLT) U.S. government-related holdings to 41% of assets under management (AUM), at the end of March, down from 43% at the end of February. According to data from Pacific Investment Management Co.s website.

The move means Total Return Fund (TLT) now has the lowest level of U.S. government-related holdings since last November. The fund also continued to decrease holdings of mortgage backed securities, keeping the stake at its lowest level since at least late 2011.

So where is Gross choosing to invest instead? PIMCO data shows that the fund increased its U.S. credit holdings to 10 percent in March from 9 percent the previous month, its non-U.S. developed market holdings to 10 percent from 9 percent in February, and its holdings of other securities to 5 percent from 4 percent in February.

In total the fund showed 5 percent exposure to money market and net cash equivalents, compared with zero percent in February, as PIMCO scaled back on its mortgage and Treasury holdings, while  increasing its effective duration to 4.97 years in March from 4.71 years the previous month.

Gross said of the changes: While PIMCO agrees with Janet Yellen that such normalization will be a long time coming (the 12th of Never?), probabilities suggest that as the Fed completes its Taper, the 5-30 year bonds that it has been buying will have to be sold at higher yields to entice the private sector back in.

Todays Other Top Stories

Municipal Bonds

WSJ: – Big hedge funds roll dice on Puerto Rico debt. – Several large hedge funds doubled down on Puerto Rico in last months giant bond sale despite the U.S. territorys financial struggles, according to confidential documents reviewed by The Wall Street Journal.

MarketWatch: – Fitch takes various rating actions on enhanced municipal bonds and TOBs. –  Fitch Ratings has taken various conforming rating actions on enhanced municipal bonds and tender option bonds (TOBs) corresponding to actions taken on their associated enhancement providers or underlying bonds.

MNI: – U.S. fixed income investors most constructive on munis among credits. – Municipal bonds could face better prospects ahead as this is the credit sector where U.S. fixed income investors prove the most constructive over the coming months both in terms of credit quality and potential for spread compression, Fitch Ratings Fixed Income Forum Survey showed Wednesday.

WSJ: – Why muni bonds aren’t just for the wealthy. – Traditionally, municipal bonds have been viewed as an investment for people with high incomes. Currently, the yield-to-maturity on a 10-year AAA rated tax-free bond is almost as high as a 10-year Treasury bond yield. On an after-tax basis, this makes municipal bonds more attractive to a larger number of investors.

Bloomberg: – Puerto Rico removal fuels record drop in risk index. – The price of protecting municipal bonds against default is dropping by an unprecedented amount, signaling that investors are separating Puerto Rico’s economic woes from a broader fiscal rebound by states and localities.

Businessweek: – Illinois sells $250 million bond in third deal since pension fix. – Illinois issued $250 million of tax-exempt bonds in its third general-obligation sale since lawmakers passed a bill in December to repair the worst-funded U.S. state pension system.

Education

LearnBonds: – High hopes for bond rates? Don’t get too excited yet. – Recently, more and more economists and economic agencies, like the International Monetary Fund, have been arguing that our expectations of economic growth in the world need to be revised downward because it has become more and more apparent that many major countries in the world need to correct structural problems in their economies. The problem is that until these structural problems are corrected, economic growth will be much lower than it has been over the past fifty years or so.

Treasury Bonds

Bloomberg: – Treasuries advance, yield drops to 3-week low on Fed, China data. – Treasuries rose, with 10-year yields falling to a three-week low, as Federal Reserve minutes damped bets policy makers are moving toward raising interest rates and a decline in Chinese exports boosted safety demand.

Corporate Bonds

Businessweek: – Exit anxiety seen as mutual funds hog corporates. – The biggest buyers of U.S. corporate bonds since the financial crisis may be the least likely to stick around when the Federal Reserve raises interest rates.

Businessweek: – UBS lowers U.S. credit to underweight saying good days are gone. – UBS AG credit strategists changed their recommendation for U.S. corporate bonds to a “small underweight” as a rise in benchmark borrowing costs threatens to erode returns.

High Yield

Blair Jensen: – Keep an eye on junk bonds. – Over the past month High Yield (junk) bonds have lagged the performance of Investment Grade (high quality) bonds. This shows a move to quality within the bond space.

Bloomberg: – Faulty hedges in junk loans foil rate protection. – Ashish Shah, who manages company-debt investments for a living, has a message for individuals who’ve poured $70.7 billion into junk-rated loans since 2012: You’ll probably be disappointed.

Market Realist: – What is driving the high yield bonds’ weekly supply market? – In this series, we’ll analyze the funds flow and issuances for the high yield bonds and leveraged loans. We’ll also discuss how markets have perceived the interest rate change and touch upon relevant ETFs such as iShares iBoxx $ High Yield Corporate Bond (HYG), SPDR Barclays High Yield Bond, Powershares Exchange-Traded Fund Trust II, and Pyxis/iBoxx Senior Loan.

Emerging Markets

NY Times: – I.M.F. warns of risk from emerging-market corporate debt. – As fears mount about emerging markets, American mutual fund investors with significant exposure to bonds issued by indebted companies in fast-growing economies may be at risk, the International Monetary Fund warned in a report published on Wednesday.

Businessweek: – Goldman says China junk debt not paying enough for default risk. – Investors in high-yield bonds from China, the majority of which come from the real estate industry, aren’t being paid enough for assuming the risk of economic slowdown and defaults, Goldman Sachs Group Inc. said.

Daniel R. Moore: – Emerging market debt options to hedge Fed taper and stock volatility. – Emerging Market Debt Funds (TEI) (EMD) are relatively undervalued at this time and are likely to provide above average risk reward returns over the next several years. Here we look at what happened to TEI and EMD during the late 1990s, and compares the pricing action to current market conditions in the two time periods.

Investment Strategy

WSJ: – Why investors should focus on after-tax returns. – It’s always important to think of the after-tax return when making an investment decision.  For some investors, that might mean investing their fixed-income allocation in tax-free municipal bonds. But, for other investors, not in the highest tax brackets, the better investment might be higher-yielding taxable bonds, and paying the tax bill.

Bond Funds

Businessweek: – PIMCOs Bill Gross picks up the pieces. – Bill Gross is working hard to steady the ship in the wake of El-Erians shock departure, back in March. It will be a long road, but don’t count against him pulling it off.

Investopedia: – PIMCO’s new ETF play – Here’s what you need to know. – Putting clients first is what Gross, and PIMCO, say they are doing with the release of 19 new actively managed exchange-traded funds (ETFs), filed with the U.S. Securities and Exchange Commission, under its official firm name, Pacific Investment Management Co.

WSJ: – Mutual-fund assets rise. – Long-term mutual funds reported estimated inflows of $6.74 billion in the latest week as investors added to stock, bond and hybrid funds, according to the Investment Company Institute.

Steeper yield curve should help 30yr auction demand despite lower overall yields

— AnthonyValeri (@Anthony_Valeri) April 10, 2014

Bloomberg reports #muniland CDS index MCDX trades 11% higher than corporate debt CDS index. Which is nuts when you compare default rates.

— Cate Long (@cate_long) April 10, 2014