Agree, very annoying! I have the feeling that vol won't pick up until the yield curve is more normal. Thanks mcurto for the heads up. Luc
A Bond Star's Plays Turn Riskier Pimco's Gross Is Making Moves To Top Better-Performing Rivals as He Waits for His Slowdown By GREGORY ZUCKERMAN August 23, 2006; Page C1 Bill Gross is Wall Street's long-reigning bond king, but he is struggling to adapt to a new world. For more than three decades, Mr. Gross, the 62-year-old chief investment officer at Pacific Investment Management Co., which has $617 billion in assets, has run the world's largest bond mutual fund. In that time, the $95 billion Pimco Total Return Fund has handily outpaced both the bond market and almost all of its competitors. In 2000, when Germany's Allianz AG bought Pimco, based in Newport Beach, Calif., it was so eager to keep Mr. Gross at the helm that it agreed to a pay package valued at about $200 million to keep him around through next year. As hedge funds and other investors have been scooping up riskier bonds with the highest yields, however, it has been harder for Mr. Gross to beat the market by buying this kind of debt. Eager to keep returns up but wary of focusing on riskier bonds, Mr. Gross has chosen to make Pimco's portfolio more volatile by focusing on short-term Treasurys and currency bets, among other things. At the same time, Mr. Gross has taken a contrarian view for many months, predicting a slowdown for the economy and an end to the Federal Reserve's campaign to raise interest rates. For much of the year that stance didn't work. The losses, and the added volatility, took a toll on Mr. Gross, a soft-spoken manager who usually keeps an even keel by practicing yoga. A month ago, with Pimco's bets misfiring, Mr. Gross was so stressed that he left the office, taking an unplanned vacation, sitting at his home with his wife, he says. "I just had to leave for nine days, I couldn't turn on business television, I couldn't pick up the paper, it was just devastating," Mr. Gross says in an interview at Pimco's headquarters, near the Pacific Ocean. "We've increased the volatility [of the portfolio] but I'm not enjoying it. You can't sleep at night." Mr. Gross, a stamp collector who has what is believed to be the only known complete collection of 19th-century U.S. postage stamps, played some golf, sat on the patio of his Laguna Beach home and ventured back to the office only after flipping through the television channels one day and noticing a bond rally was under way. Now, his predictions that the housing market would slump and the economy would suffer are starting to show signs of materializing, sending the bond market on an impressive rally that has sent the benchmark 10-year yield -- which moves in the opposite direction of its price -- down to 4.817% yesterday from 5.25%, since June 28. That is helping Pimco's portfolio to jump. The fund is up 1.55% on the year, above the 1.44% return of Lehman Brothers' key bond index, as of Aug. 17. The returns are better than 74% of all comparable bond funds, according to Morningstar Inc. Mr. Gross acknowledges that the fund's biggest competitors are doing much better. Western Asset Management's Western Asset Core Bond fund is up 2.36% through Aug. 17, for example, while Metropolitan West's Total Return Bond Fund is up 2.52%. Mr. Gross is famously competitive and says he isn't happy with the results. The firm's returns are "a constant report card on who you are," he says one recent afternoon, the top button of his shirt undone, an unmade tie around his collar. Mr. Gross and his team have been focusing on short-term Treasury bonds, currencies and other moves that tend to make results jump around more rapidly in an effort to try to generate better returns. The fund now averages a daily volatility of about 0.05 percentage point above the volatility of the overall bond market -- not especially volatile compared with many stock portfolios, but about twice the fund's volatility in the past. "Our approach is to accept more volatility in areas we don't consider to be risky and we are more confident of," he says. "It's getting harder because risk takers" like hedge funds are driving yields on many bonds lower. Mr. Gross then launches into another bout of self-reflection, saying he is embarrassed when he sees clips of his frequent television appearances, noting the many times he uses the phrase "you know." And he acknowledges that his prediction for a slowdown for the U.S. has been wrong, in part because the rest of the world's economies have expanded at an impressive clip, helping the U.S. Others aren't as critical. "He was a little early in anticipating a slowdown, but he lives in a crucible that is something of his own making," says Eric Jacobson, an analyst at Morningstar Inc. "He's extremely competitive, but, from the point of view of a client, I don't think they should be all that worried." Still, some investors are expressing less enthusiasm. For the first time in years, his bond fund hasn't added to its U.S. client base in the past six months, compared with average annual growth in recent years of 20%, he says. That is in part because U.S. institutions are becoming more comfortable with putting some money into alternative investments, such as private-equity and hedge funds, and are moving some investments from traditional stock and bond vehicles. New investments still are coming in from foreign investors. And Pimco continues to see solid asset growth of 10% or so, in part because some products it has launched, such as those investing in real estate and commodities and even a new hedge fund of its own, are hot. Many of these products use bond investments for which Mr. Gross's team is responsible. Mr. Gross remains bullish on bonds, which tend to do well in a slowing economy, in part because weakness in the housing market will discourage the Fed from raising short-term interest rates -- and could even get them to cut rates in the year ahead, he says. Mr. Gross collects reams of data on the housing market and reads it at home on the weekends, and Pimco even sends "shoppers" to key markets across the country to pose as home buyers and pick up intelligence on where housing is going. Part of his concern stems from the aggressive adjustable-rate mortgages he has seen many consumers -- including two of his children -- take on. He isn't sure they will be able to handle the monthly payments when the interest rates on these mortgages adjust higher. "We could really see a drop in home prices that hurts the economy," he says.
Agreed, the guy's been the everlasting bull, and it's worked the past 20 years, the fiscal year ain't even over yet, WSJ should put a disclaimer, there may be further for bonds to fall yet... Frankly betting Big on less volatility, sounds a little oxymoronish... but i guess when you're in the cut throat business of selling IM, you can be forced to chase return...
Mr. Gross at it again selling 10yr volatility. Here is the risky part . . . they are selling strangles, big surprise. Starting to sell the March 104-110 strangle in the 10yr options and only collecting 40 ticks of premium. That is setting the range nearly six months out, but they'll probably be right. Also, the goldman prop desk killed at the money volatility today selling 10,000 of the Oct 107and 6,000 Nov 107 10yr straddles along with 10,000 synthetic Dec 109 straddles. Oh ya, they also sold the 30yr Oct 110 straddle. This is a pretty large stand in front of the Bernanke speech tomorrow. I guess they think Big Ben sticks to the plan and doesn't spook anyone. Housing slowing, inflation risk, but still positive moderate growth, blah, blah, etc.
It's a shame to see the famed bond king: A.) Desperately cheerlead his position B.) Pout, whine and stick his head in the sand when A fails 9 days of pity, now broadcast worldwide, is not something investors want to hear. Typical modern-day human; massive egos stroked to the heights, but one mistake and they're a house of cards. Doesn't matter if it's an athlete, a McKid or a reality show buffoon. They're all seconds away from being hit by the bell curve. The gravy train switched tracks, so pay attention.