Gross’s Replacements Thrive Undoing His Rate Bet At Pimco Fund

Yield Gap

At the same time, Pimco Total Return entered into swaps with a notional value of $53 billion that would pay off if short-term interest rates rise. The firm exited $22.5 billion of swaps that lose money when short-term rates climb.

The moves were designed to profit if medium-term bonds bested short-term ones, leading to a narrower gap in yields. That’s what happened in the fourth quarter: the extra yield that 10-year Treasuries paid over 2-year notes shrunk to 1.51 percent from 1.92 percent.

“We have moved our yield curve exposure out of what we think is the significantly overpriced front end and focused our exposure in 7- to 10-year maturities,” Mather wrote in a February strategy commentary. That and other shifts “will pay off in the year ahead.”

Performance ‘Detractors’

At the Janus Global Unconstrained fund, Gross took the opposite approach to shorter-term bonds. Of the $975 million in corporate debt that he purchased in the quarter, more than 90 percent comes due by 2017, according to a Feb. 27 filing with the U.S. Securities and Exchange Commission.

Gross, using options, futures contracts and interest-rate swaps, echoed his previous Pimco wager by investing in 10-and 15-year Treasuries, while shorting 30-year bonds. The net result of the derivatives trades was a $2.2 million loss.

The Janus fund traded futures “with the expectation that the long end of the yield curve would steepen while the short end of the curve would remain anchored,” the firm said in a quarterly shareholder report. The positions were performance “detractors,” even as energy investments hurt more.

Gross has come around to the view that higher interest rates are likely at midyear as near-zero borrowing costs threaten to create bubbles in the stock and bond markets.

“The Fed is willing at this point to at least acknowledge that by raising interest rates 25 basis points in June,” he said in a March 2 Bloomberg Television interview.