MutualFundWire.com: Another Nightmare For Gross: Inflation Bet Was Lost

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Wednesday, July 3, 2013

Another Nightmare For Gross: Inflation Bet Was Lost

Bill Gross isn't simply fighting the four-headed dragon that is a rise in interest rates for a mutual fund heavily concentrated in bonds. He's also confronting the effects of inflation changes, Bloomberg's Mile Weiss and Alexis Leondis reported. Gross bought inflation-linked Treasuries, betting that the world central bank's expansive monetary policies would continue.

Though treasuries fell as Gross predicted, inflation did as well. The bad bet exacerbates Gross' losses for the Pimco[profile] Total Return Fund. The fund had 12 percent in Treasury Inflation-Protected Securities and fell 4.7 percent two months after.

DoubleLine founder Jeffrey Gundlach avoided TIPs, but Pimco owns 10 percent of the market. Pimco's large market share makes it difficult to change their positions:

With such a large market share, it’s difficult for Gross and other Pimco managers to meaningfully change their positions without moving prices, said a former bond manager at the firm who requested anonymity. As a result, Gross must accept short-term volatility in the fund as the price of making long-term bets in the TIPS market he said.