A Cruel, Cruel Summer for US Credit Funds

It's shaping up to be a brutal summer for bond investors as the bloodbath in the U.S. credit market
shows no signs of letting up, even as nearly $80 billion has already been wiped from funds.

The past six weeks have been humbling for well-known fund managers including Bill Gross of Pimco,
Jeffrey Gundlach of DoubleLine Capital and Ray Dalio of Bridgewater Associates all victims of a
violent selloff in U.S. Treasurys, mortgage-backed securities or inflation-protected bonds.

On Friday, the yield on the benchmark 10-year Treasury note touched 2.73 percent, gaining more
than a full percentage point since early May, as better-than-expected U.S. jobs data fanned
speculation that the Federal Reserve could begin to scale back its $85 billion-a-month bond-buying
stimulus this fall.


While some bond managers are putting on a brave face, saying the market's broad-based sell-off is
overdone, others recall the sharp rise in interest rates two decades ago that wreaked havoc on some
bond portfolios. In June alone, bond mutual funds and exchange-traded funds lost a record $79.8
billion, according to TrimTabs Investment Research.

That data does not include losses incurred by hedge funds.

"Five years of bond investors' income wiped out in a single quarter is tough. Not knowing if next
quarter will reverse that, or repeat it is tougher," said John Brynjolfsson, managing director of global
macro hedge fund Armored Wolf.

Friday's jobs report cemented market expectations for the Fed to start winding down its massive
stimulus program as early as September.

With Fed Chairman Ben Bernanke warning that the central bank will not keep buying Treasurys and
mortgage securities forever, the yield on the 10-year Treasury note has surged 110 basis points since
its low close of 1.62 percent on May 2 and the yield on some 30-year agency mortgage-backed
securities has risen about 1 percentage point to about 3.71 percent.

John Paulson's $5.8 billion credit fund at his Paulson & Co firm lost 3.8 percent in June, according to
an investor letter. The fund is still up 11.7 percent for the year.

BlackRock's Obsidian Fund fell 4 percent through June 21 and Pine River's Fixed Income Fund lost
about 1.4 percent last month, sources familiar with the matter have said.

It's too soon to know how deep the carnage will go as many credit-focused hedge funds have not yet
reported June performance numbers. But the early indications are that few with credit market
exposure will be immune, especially as bond yields keep surging and bond prices keep falling.

Syl Flood at Morningstar, which tracks mutual funds, said the amount of money being pulled out of
bond mutual funds is akin to levels he saw after Lehman Brothers collapsed in September 2008,
which caused investors to run from most asset classes, including bonds.

In June, investors withdrew a record $9.6 billion from Pacific Investment Management Co's flagship
PIMCO Total Return Fund, the world's largest bond fund, which is down 3 percent for the year,
according to Morningstar.

Investors pulled $1.2 billion out of the DoubleLine Total Return Bond Fund in June, marking the first
ever month of outflows from the $38.7 billion fund, which is down 0.43 percent for the year,
according to Morningstar.

The TCW Total Return Bond Fund logged its biggest monthly outflow since December 2009, with
$745 million leaving in June, according to Morningstar. The fund was down 2.075 percent in June, its
weakest performance since February 1996.

DoubleLine's Gundlach had kept substantial cash reserves in anticipation that many months of net
inflows ultimately would go through some period, at least over the short term, of a reversal, a
DoubleLine spokesman said.

Pimco declined to comment, while TCW was not immediately available for comment.

Bond managers have been quick to say the selling is excessive and June's losses may be short-lived.
Unlike 20 years ago, there is no indication that the Fed is about to raise real interest rates anytime
soon even if Treasury yields keep surging, they say.

"This is nowhere close to being as impactful as some things in the past," said Dan Fuss, vice chairman
and portfolio manager at Loomis Sayles. "The pain, I think, would be for somebody that would have
to sell into this."

The Loomis Sayles Bond fund, the company's $21.8 billion flagship offering, has seen net outflows of
roughly $656 million for June despite an average gain of 0.61 percent in the year through July 3.

The hardest hit bond categories in June, according to Lipper, include intermediate investment-grade
debt funds; high-yield "junk" bond portfolios, and inflation-protected securities funds.

The list of casualties goes further than purely bond-focused funds.

Some funds that rely on computer-driven trading strategies were whipsawed by the fierce sell-off in
bonds and a simultaneous drop in global stock markets.

For instance, Renaissance Technologies Corp, the hedge fund founded by James Simons, saw its
Renaissance Institutional Futures Fund lose roughly 4 percent in June, putting yearly losses at 7
percent, according to data reported to prime broker Newedge.

BlueCrest's BlueTrend fund saw one of its feeder funds register a 16.9 percent slump from May 17 to
June 28, Bridgewater's All Weather fund is down 6.49 percent year to date, and Tudor Investment
Corp, the $11.6 billion hedge fund firm founded by Paul Tudor Jones, saw its $283 million Tudor
Tensor Fund lose 4.5 percent in June, and is down roughly 2.2 percent for the year.