Speaking at the annual meeting of the International Swaps and Derivatives Association, Hinman said the $374 billion bond fund’s use of credit derivatives was “certainly the most rapidly growing part of our investment portfolio.” Further the derivatives could make up 20% to 25% of its credit portfolio, according to a Reuters report.
As for the uses of credit derivatives, Hinman said the main drivers from PIMCO’s perspective are:
- to get exposure to companies where trading in the cash bonds is limited
- to cut down on cash bond exposure or to more easily short-sell corporate names
- to do various relative value trades
- to use the tradable trusts established to operate as a type of credit “index.”
In reference to using tradable trusts, Hinman said Wall Street dealers need to do a better job of fostering trading and markets for the two players in this space, iBoxx and Dow Jones TRAC-X.
“We as a large asset manager do not think it’s that liquid overall,” Hinman said of the indexes. However, Hinman’s concerns may be addressed soon, as recent speculation points to the very real possibility that the two main credit default swap trusts may become one to improve the liquidity of the market.
PIMCO is not alone in seeking out credit derivative products to hedge against its long bond holdings. Especially after the credit crunch of 2002, and even recent high profile defaults, such as Parmalat, more companies are looking for ways to protect their credit positions without a large outlay of cash.This is where the credit default products have become helpful. Through the use of the tradable trusts, portfolio managers are able to buy “insurance-like” positions to protect their portfolio.
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