Bonds issued by less than Aaa-rated sovereign nations as well as corporations contain “credit risk,” which causes their yields to be greater than those of countries such as the U.S., providing an opportunity for bond investors, Gross wrote in his commentary. Investors also require more compensation for bonds perceived to have greater risk of yield swings, or “volatility premium.” Trading strategies that profit from movements in yield differentials between debt of different maturities, the so-called yield curve, will be another avenue for bond fund managers to garner profits, Gross wrote.
“We know maturity/duration extension is becoming a tired horse, but it may still have a place on the battlefield under certain conditions,” Gross wrote in the note. “Total carry, or the total ‘yield,’ of a portfolio is Pimco’s dominant focus, not duration reduction.”
Duration measures a security’s price sensitivity to changes in yields and generally increases with maturity.