PIMCO’s Gross bets against U.S. swaps, not Treasuries

By Jennifer Ablan

NEW YORK (Reuters) – Contrary to popular belief, bond manager Bill Gross’ bet against the United States has not been in the U.S. Treasury market but in interest-rate swaps, according to PIMCO’s website on Thursday.

Gross, the manager of the world’s largest bond fund, in May maintained his existing short position without any adjustments even as U.S. Treasury debt prices soared.

As of May 31, Gross’ $243 billion Total Return fund held a negative 9 percent short position in swaps and liquid rates sector, which will now include U.S. dollar-denominated interest-rate swaps, swaptions, options, and other derivatives. That position was unchanged from April.

The latest data makes it appear as if the fund’s total short position is 9 percent — up from the previously reported short position of 4 percent, but that could not be confirmed with Pimco and cannot be determined by looking at the data provided.

PIMCO’s money market and cash equivalents exposure dropped slightly to 35 percent as of May 31 from 37 percent as of the end of April.

PIMCO’s spokespeople declined further comment.

Gross’ move to ratchet up his bearishness in March by taking his initial short position in U.S. government-related debt — which then had been categorized as Treasuries, TIPS, agencies, interest-rate swaps, Treasury futures and options and FDIC-guaranteed corporate securities — has been the subject of market criticism, given the furious rally in U.S. Treasuries.

But the Total Return fund, as illustrated, has not been short in those U.S. government securities.

Last week, a source familiar with the matter told Reuters that Gross is not short Treasuries, but swaps. Swaps are an agreement between two parties to receive a fixed rate of interest and pay a floating rate (three-month LIBOR). A negative number in “Swaps and Liquid Rates” indicates a negative duration position in U.S. interest rates achieved by swaps or other interest-rate derivatives.