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Bill Gross Trying to Short Credit to Reverse Decades of Instinct

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Bill Gross, who built a career and a $1.9 billion personal fortune as a bond investor, is trying to overcome his reluctance to bet against corporate debt, a position that he said runs contrary to his instincts and training.

Gross, who manages the $1.3 billion Janus Global Unconstrained Bond Fund, said he expects corporate-bond prices to fall in part because they’ve risen so fast since mid-February but also because he believes a day of reckoning will come when central banks will no longer be able to prop up assets and investors will withdraw from markets.

“It’s really hard to change your psychological makeup and to be a hedge manager that is comfortable with being short,” he said in an interview with Bloomberg’s Erik Schatzker. “I’m working on it, because I’m an investor that ultimately does believe in the system, but believes that the system itself is at risk.”

Central bankers, seeking to stimulate economies, have lowered rates below zero in Europe and Japan, driving down returns on national debt, while investors seeking higher yield have pushed up the value of other credit. Stimulus from central banks worldwide has artificially pushed up values of stocks and credit, which has made Gross cautious on such assets, he said.

Eliminating credit as an investment means “not buying stocks, not buying high-yield bonds,” Gross said. “It means going the other way, which comes at a price.”

Corporate credit has rallied since a selloff early in the year, with junk-rated bonds delivering gains of almost 14% since the markets bottomed in February. Gross indicated he probably would take a short position via credit-default swap indexes rather than shorting companies.

To take risk, Gross said he’s still selling protection against bond market volatility, a favorite trade in recent years, but one that’s becoming less attractive.

“I’m toning it back,” Gross said. “It’s part of me, OK, and so the Bill on this shoulder has to listen to Bill on this shoulder in order to make a transformation.”

Gross cited a number of scenarios that may prompt him to short credit, including a slowdown in China that would spill over into financial markets, Britain leaving the European Union, an escalation of problems in Greece or Brazil. Another such scenario is if the U.S. Federal Reserve raises interest rates faster than markets can handle, Gross said.

Gradual Path

The U.S. federal funds target rate is between 0.25% and 0.5%. Eventually, central bankers will have to raise rates to reward individual savers, insurance companies and other investors who depend on fixed income returns, or the economy and markets will suffer, according to Gross.

The Fed will boost the rate in June and should continue a gradual path of increases, Gross said. Since last week when the Fed released minutes of an April meeting indicating the economy has strengthened enough for a rate increase, the probability of a hike at the June 15 Federal Open Market Committee meeting has climbed to 34%, according to futures information compiled by Bloomberg.

“They should move gradually, there is no significant inflation,” Gross said during an interview taped before his appearance at a fixed-income seminar sponsored by Bloomberg. “The gradual pace, which has been on their plate for years now, is really the first requirement. But if it’s too gradual, then ultimately 5, 10, 15 years down the road, savings investment and the economy itself suffer.” PIMCO Career

Gross co-founded the Pacific Investment Management Co. in 1971 and built a career during a period of falling interest rates, which made shorting debt a losing bet. He led the PIMCO Total Return Fund to become the world’s largest mutual fund before investors started withdrawing money in 2013. In September 2014, he was ousted from the firm and jumped to join Janus.

The Janus unconstrained fund has advanced 2.6% so far this year, outperforming 70% of its peers, according to data compiled by Bloomberg. It has returned 1.7% since Gross took over management in October 2014. About half of the fund is Gross’s personal money.

The fund, which Gross co-manages with Kumar Palghat, invests in fixed-income and derivative instruments. It has an effective duration of 1.13 years, a short-term position that aims to reduce exposure to losses if rates rise.

It’s becoming increasingly difficult for money managers to justify their fees or their jobs, Gross said.

“I know that my investors want three, four, or five percent, or else they can keep it in the bank or stuff it in their mattress,” he said.

— Check out El-Erian: Fed to Hike in July, September on ThinkAdvisor.


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