Bill Gross tells reporters that he plans to purchase municipal bonds and mortgage loans soon.
Banks’ unwillingness to lend money to hedge funds and other investors has forced them to dump those assets with little regard for price.
Gross, who manages the world’s biggest bond fund, PIMCO Total Return, is a buyer. These are "high quality assets that are regurgitated into the market place at prices that are more attractive than we have seen in decades,” he says.
"We’re moving into assets that have been unwound and sold without discretion. There are tremendous hedge-fund unwinds of municipal securities,” says Gross, PIMCO’s chief investment officer.
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Just this week Peloton, a London hedge fund, said it is closing down a $1.8 billion asset-backed fund, because banks won’t lend it money. Thornburg Mortgage, a New Mexico finance company, said it may have to dump securities to meet margins calls.
And Sailfish Multi-Strat Fixed Income fund of Connecticut, which was worth $1.9 billion in July, is liquidating its positions after making bad credit bets that led investors to demand their money back.
Gross was much smarter with his investing. PIMCO anticipated the bursting of the U.S. housing bubble and the Federal Reserve interest-rate cuts. Thus it ploughed money into short-dated Treasury bills and increased its allocation to cash, waiting for the credit markets to turn sour.
PIMCO was ready for a housing collapse as far back as three years ago, Gross says. "We didn’t invest in sub-prime, and we’re reaping the benefits as our competitors who did suffer significant price losses.”
Gross said on CNBC Thursday that PIMCO is snapping up highly-rated commercial mortgage- backed securities, even though some experts say that will be the next shoe to drop in the credit markets.
"Most of these structures we are buying are AAA-rated, well protected, and they are yielding 250 basis points over Libor,” Gross told CNBC.
The fact that "the talk on TV is that the commercial real estate market is the next problem market” merely provides PIMCO with a buying opportunity, Gross says.
The commercial real estate market has dropped to the point that the yield premium on the triple-A rated CMBX-4 index of commercial mortgage-backed securities over interest-rate swaps soared to a record high of 228 basis points this month, according to JP Morgan Chase, as reported by Reuters.
The performance of Gross’ PIMCO Total Return fund has certainly acted as a hedge against real estate. While the fund lost ground during the housing boom of 2004-06, it recouped those losses last year with a solid 10.7 percent return, outperforming 94 percent of its peers, according to Bloomberg’s calculations.
The fund reports on its web site that as of January, 46 percent of its assets were in mortgage bonds and 19 percent in investment-grade corporate debt.
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