Gross Says Bond Contract Sanctity Diminished: Tom Keene

Pacific Investment Management Co.s Bill Gross
Pacific Investment Management Co.s Bill Gross. Photographer: Andrew Harrer/Bloomberg

The “sanctity” of bondholders’ contracts has been diminished by Greece’s pushing through the biggest sovereign restructuring in history, according to Bill Gross of Pacific Investment Management Co.

“The rules have been changed here,” Gross, co-chief investment officer at Pimco, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “The sanctity of their contracts is certainly lessened. Bondholders have that to look forward to going into the future.”

Greece drove through its debt swap after cajoling private investors to forgive more than 100 billion euros ($132 billion) of debt, opening the way for a second rescue package. The subordination of private bondholders to government organizations such as the European Central Bank may have added as much as 1 percentage point to bond yields, Gross said.

Greece’s use of collective action clauses forcing investors to take losses under the nation’s debt restructuring will trigger payouts on $3 billion of default insurance, the International Swaps & Derivatives Association said. A total 4,323 credit-default swap contracts can now be settled after ISDA’s determinations committee ruled the use of CACs is a restructuring credit event.

Pimco, based in Newport Beach, California, is a member of the ISDA committee.


“I would suggest overwhelmingly that the CDS is going to be triggered,” Gross, the founder of Pimco and manager of the world’ biggest bond fund, said before the ISDA decision. “It’s sort of like a half-nelson or even a full-nelson in wrestling terms being applied to bondholders under Greek law. They’re all being forced to go along.”

Yields on Greece’s new bonds may climb to as high as 20 percent amid “material risks” stemming from implementation of terms for the biggest sovereign restructuring in history, Morgan Stanley said yesterday in a report.

Traders are offering to buy and sell the potential new bonds at yields on 11-year securities of 22 percent, according to a person yesterday familiar with the prices who declined to be identified because he wasn’t authorized to comment. Pimco has said that the firm doesn’t own any Greek debt.

“I’m not forecasting a second default but the markets certainly are,” Gross said. “Markets expect another one down the road.”

Gray Market

The so-called gray market for the new Greek debt is trading actively as prices have risen about 7 cents on the dollar to yield about 15 percent to 20 percent, according to a person familiar with the trades who declined to be identified because he wasn’t authorized to discuss the transactions.

In the U.S., employers boosted payrolls more than forecast in February, capping the best six-month streak of job growth since 2006. The jobless rate held at 8.3 percent. The 227,000 increase in payrolls followed a revised 284,000 gain in January that was bigger than first estimated, Labor Department figures showed today in Washington.

“It’s a good number, not just the headline but also the revision,” Mohamed El-Erian, who shares the title of chief investment officer with Gross, said today in an “In the Loop” interview with Betty Liu on Bloomberg Television. “It’s indicative of a healing process. We’re not yet at escape velocity.”



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