The Bill Gross Trade

Bill Gross’ departure from PIMCO rattled the bond markets for three or four days on the expectation that redemptions from his famous Total Return Fund would put upward pressure on interest rates and negatively impact corporate bonds. It’s a credit to Bill’s stature that one man can influence an extraordinarily large and deep market. No credit, however, belongs to the trading community for thinking that PIMCO’s redemptions imply lower prices.

PIMCO reported $23B worth of redemptions from Bill’s flagship fund during September. This is a large amount of money for an investment team to liquidate, but where were the assets going? It’s common for investors to withdraw their assets from an investment firm when its lead investor departs, but it’s not common that these assets depart the asset class itself. In fact, investors switch managers, redeeming their investments with PIMCO while simultaneously subscribing to funds operated by competitors such as DoubleLine, Legg Mason or TCW, to name a few. The overall effect on the market should be neutral, since PIMCO’s total bond sales should be matched with its competitors purchases.
But wait…there is more to it than just this. Investors tend to switch to better performing managers. At the margin, there may be slightly higher demand for some fixed income sectors versus other sectors owing to the fact that PIMCO’s strategy differs slightly from its competitors. These marginal differences should help predict the net relative impact on the fixed income sectors…

The winning strategies over the last year or two have been overweight US duration, overweight European bonds and overweight High Yield credit. The logical implication is that the money redeemed from PIMCO would find its way into managers who continue to hold these biases. This means that the net effect of the switch should increase duration, increase European holdings and increase high yield demand. Rather than causing interest rates to rise and credit to sell off, the net effect should be exactly the reverse!

The bottom line is that Bill Gross’s departure should be marginally good for bonds.

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