Trillion-Dollar Firms Dominating Bonds

SEC probes into the bond market were prompted in part by lopsided growth since 2008; the two largest firms now manage $3 trillion in bonds.

Bill Gross and Larry Fink manage a $3 trillion pile of bonds—an amount almost as big as Germany’s economy. Their firms, Pacific Investment Management Co. (Pimco) and BlackRock Inc., doubled holdings since 2008, outpacing the market’s growth of 50 percent.

Some of the largest hedge-fund firms, including Bridgewater Associates LP and BlueCrest Capital Management LLP, have also more than doubled their investments in debt, data compiled by Bloomberg show. At the same time, Wall Street banks are shrinking their stakes in bonds, Federal Reserve data show.

At the same time, regulators are examining the way larger firms benefit in markets where transactions are often executed the same way they were a decade ago—through telephone conversations and emails.

In this two-tiered market, brokers choose which rivals and clients may see their bond prices on electronic trading systems by turning quotes on and off. Dealers often give bigger investors better prices in return for all of the business they do with Wall Street.

The funds that attracted the most assets in the previous four years experienced some of the biggest withdrawals. The world’s largest bond fund, Pimco’s Total Return Fund, for example, reported $8.3 billion of outflows in the first three months of 2014. That overwhelmed $6.4 billion of inflows into the rest of funds in its category, Morningstar data show.

The largest bond-fund managers have been able to amass a disproportionate amount of securities over the past five years partly by getting first dibs on new corporate-bond sales. The SEC is also investigating whether banks are fairly divvying up new issues and whether they give preferential treatment to top clients.

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