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.
Pimco is using derivatives that are quicker, easier, and cheaper to trade than the bonds they're tied to after redemptions and losses shrunk its $248 billion Total Return Fund by 15 percent in six months, ending its five-year reign as the world's biggest mutual fund. Swaps allow investors to wager on the health of U.S. companies even as dealer debt inventories shrink and a potential Fed bond-buying pullback prompts investors to withdraw cash from bonds paying record-low yields.
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