Trillion-Dollar Firms Dominating Bonds Prompting Probes in U.S.

So the Big Beasts rig it all. Surprised, really?


When Bill Gross sells, it resonates throughout the market -- and a world of falling bond prices may be only just beginning. 
Photographer: Andrew Harrer/Bloomberg

Tinga
By Lisa Abramowicz
via Bloomberg
14 April 2014

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. 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.

The lopsided bond market has caught the attention of the U.S. Securities and Exchange Commission. Not only is the SEC examining whether the biggest players get preferential prices and access because of their influence, it’s also worried about what happens when the five-year bond rally ends as U.S. policy makers prepare to raise interest rates.

“It’s going to be interesting to see who’ll take the other side of the trade if there’s a meaningful sell-off, which presents a huge risk,” said Arthur Tetyevsky, a credit-trading strategist at Imperial Capital LLC in New York. “We’re much closer to the end of the rally, that’s for sure.”

The biggest funds’ dominance may make it harder for everyone to sell when the Fed boosts borrowing costs from record lows and sends bond prices tumbling. In essence, their selling may crowd narrowed exits, making it more painful as all investors race to get out of a falling market.

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