Pimco's Big CDS Wager

Displaced as manager of world's largest mutual fund, Pimco bets at least $10 billion on U.S. credit-default swaps.

Pacific Investment Management Co. (Pimco) is wagering at least $10 billion in the credit-default swaps market that U.S. corporate bonds will gain as the Federal Reserve extends unprecedented stimulus into 2014, according to traders and investors.

The manager of the world’s biggest bond fund amassed the positions by creating swaps tied to the Markit CDX North American Investment Grade Index, which contains 125 companies from Ford Motor Co. to Staples Inc., according to five people at hedge funds and banks who asked not to be identified because they aren’t authorized to discuss the trades. Investment firms and other non-dealers held a total of $39 billion in net wagers in the index as of last week, industry data show.

In emerging markets, relative yields widened 4 basis points to 345 basis points, or 3.45 percentage points, according to JPMorgan Chase & Co.’s EMBI Global index. The measure has averaged 313.9 this year.

Pimco has amassed similar trades in the credit-swaps index in recent years. The money manager sold $10.7 billion of credit protection on the Markit CDX in the second quarter of 2011, increasing its total positions in the index contracts to $11.8 billion, according to an August 2011 regulatory filing.

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