Fears that Pimco and other Big Firms being unable to unload risky bonds 

Financial experts warn that a small group of giant asset managers that have amassed high-risk, high-yield bonds could find themselves unable to raise enough cash during a sell-off.

When it comes to high-risk bonds, the asset management giant Pimco has pretty much cornered the global market.

Be it bonds issued by the automotive financier Ally Financial or the student loan financier SLM in the United States, or government bonds in Spain and Italy, Pimco holds a commanding position in these high-yielding securities.

But as Pimco’s portfolio managers double down on their bet that high-risk bonds will thrive in a world of low interest rates, a growing number of global regulators are warning that the positions being taken on by the big asset management firms pose a broad danger to the financial system.

These concerns were amplified this week as stock markets gyrated, the yields of high-risk corporate and European bonds spiked upward and, crucially, trading volumes evaporated.

Regulators and bank executives have cautioned that an accumulation of hard-to-trade, risky bonds by a small group of fund companies could turn a bond market hiccup into a broader rout, in light of how illiquid many of these securities have become.

The latest to sound the alarm was the International Monetary Fund, which recently released a report warning about large bond investors like Pimco that have built up dominating stakes in high-risk, hard-to-sell bonds all over the world.
“Credit-focused mutual funds have seen massive inflows and have become the largest holders of corporate and foreign bonds,” José Viñals, the head of the I.M.F.’s financial-markets division, said at a news conference in Washington last week. “These inflows have created a liquidity illusion, which can amplify shocks and lead to sharper falls in the market.”

As the I.M.F. report lays out, Franklin Templeton Investments has large stakes in the high-yield bonds issued by Tenet Healthcare and the payment processor First Data, among others. Franklin has also bet big on bonds from Ireland and Ukraine.

The chief risk officer of Goldman Sachs, Craig W. Broderick, warned at the I.M.F. meetings last week that the asset management firms that now hold the bulk of these bonds had not yet been tested in terms of how they would react to a market shock.

“People are worried about massive liquidations in a market that is not as liquid as it used to be,” said Amy Koch, a senior trader at Standish, a Boston-based bond manager.
Pimco oversees about $1.9 trillion in bonds — making it the largest bond manager in the world. And unlike its peers, it invests all this money on the basis of a firmwide investment view that was heavily promoted by Mr. Gross.

Source: NYT-Fears that Pimco and other Big Firms being unable to unload risky bonds

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