Big Bond Investors Look Beyond Market Size

Pimco and others shift from weighting government bond holdings by amount of debt; move may raise borrowing costs for industrialized nations.

The world’s biggest investors are moving away from allocating money to government bond markets based on their amount of debt, a strategy that has favored the largest borrowers for three decades.

Norway’s $702 billion sovereign-wealth fund and Pacific Investment Management Co. are starting to shift to indexes that favor less-indebted nations with growing gross domestic product, such as Brazil and South Korea. Pimco boosted the proportion of Mexican holdings while trimming the percentage allocated to U.S. issues in its biggest exchange-traded fund. BlackRock Inc., the world’s largest money manager, with $3.8 trillion in assets, has $3 billion tied to a gauge based on credit-worthiness rather than capitalization.

Bigger Gains

Indexes based on the size of economies are doing better than those using the amount of debt outstanding.

Transition Phase

About 25 percent of Towers Watson’s institutional clients are moving away from market-based weightings in some part of their holdings, London-based Redmond said in a telephone interview Dec. 12.

Sales Soar

Sales of U.S. corporate and sovereign issues reached $1.1 trillion in 2012, up from $962.8 billion the year before. GDP growth is expected to slow to 2 percent in 2013 from 2.3 percent last year, according to the median estimate of economists surveyed by Bloomberg. Japan’s economic growth is expected to slow to 0.7 percent in 2013 from 2 percent in 2012, a separate survey shows.

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