Pimco’s Latest ETFs Add to the Ultra-Short Treasury Fund Trend

The issuer’s new funds started trading on Thursday.

Bond fund giant Pacific Investment Management Company, usually known as Pimco, launched two new bond exchange-traded funds on June 22. One is a long-term global fund that invests in all bond assets and the other focuses narrowly on ultra-short-term Treasury bills. 

The first fund is the PIMCO Ultra Short Government Active ETF (BILZ), which invests in Treasuries with maturities of six months or less. ETFs like this offered rates near 0% for most of the period between 2009 and 2022, but the Federal Reserve’s rate hikes of the past year and a half have changed things considerably. 

Short-term Treasury yields are now over 5%, which is actually higher than longer-term Treasuries, a situation known as an inverted yield curve. Typically bond issuers need to offer higher yields for longer-term bonds, just las longer-term mortgages have higher rates.  

However, when investors worry the economy will take a downturn, causing the Fed to lower rates, they’ll pile into longer-term bonds to lock in currently high rates. This causes demand for longer-term bonds to get so high, it pushes down the yield bond issuers need to offer. 

Imperfect Predictor

An inverted yield curve is often considered a harbinger of recession, but it isn’t a perfect predictor, and investors should look at multiple factors when attempting to predict economic trends.  

Fund companies are clearly recognizing this newly attractive segment of the bond market, as Pimco is the second firm to launch an ultra-short-duration bond fund this week. Thematic ETF issuer Global X launched its own fund, the Global X 1-3 Month T-Bill ETF (CLIP) Wednesday. 

Whereas BILZ invests in a narrow segment a particular part of the bond market, Pimco’s other fund, the PIMCO Multisector Bond Active ETF (PYLD), is the polar opposite: It can invest in all kinds of bonds across the globe. 

PYLD, on the other hand, is a go-anywhere global bond fund that will invest in a wide array of fixed income investments. Currently it holds mortgage-backed securities, Treasuries of several different durations and JPMorgan Chase & Co. corporate bonds, among other holdings.  

With such a wide array of assets, the appeal of this fund depends substantially on how much investors believe in Pimco’s skill in active management. 

Contact Gabe Alpert at [email protected]