Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Many investors have hated corporate credit over the past few years. Some have tried to wager against it.

But many of those unlucky souls have, in trader parlance, gotten their faces ripped off. After all, this market just can't stop rallying, with the exception of a few hiccups here and there.

Higher and Higher
U.S. corporate bonds can't help themselves but grind higher these days
Source: Bank of America Merrill Lynch index data

And yet here comes Bill Gross, the legendary billionaire bond trader, who seems ready to join their painful campaign against company bonds by shorting them in preparation for a day of reckoning.

"I’m an investor that ultimately does believe in the system, but believes that the system itself is at risk,” Gross, who manages the $1.3 billion Janus Global Unconstrained Bond Fund, said in an interview with Bloomberg's Erik Schatzker. There will be a day of reckoning in the near future, Gross indicated, as central bank policies run out of steam and fall on their heads, leaving credit debris in its wake.

Gross said he's trying to work himself up to short-sell credit in response to his general negative view as well as clients' requests. But he acknowledged, "It comes at a cost, because instead of realizing carry, the spread and the yield, you pay for it."

In other words, it's expensive to maintain short positions, since all those regular coupon and interest payments work against you.

It's a good thing that there are still investors trying to take the other side of this relentless market. That ostensibly creates some balance. But it's an easier trade to get wrong than right.

This market is so easy to dislike, particularly the riskiest slices of it. Since 2008, U.S. high-yield and investment-grade bonds have gained an average 8.6 percent a year, Bank of America Merrill Lynch index data show. Yields have shrunk to 4.1 percent on average for dollar-denominated debt, compared with an average 6.1 percent over the past two decades.

Leaking Energy
U.S. corporate-bond prices have trended down since 2013, but slowly and choppily
Source: The BofA Merrill Lynch US Corporate & High Yield Index

All the while, the amount of such debt has more than doubled since the end of 2008 to $6.7 trillion, with investors at times lending rather indiscriminately. Those elements tend to create a story with a sad ending.

And indeed, the market certainly seems fragile. But that's not enough to make a bearish investor rich.

A short-seller would have to time a downturn perfectly and choose the correct tool to bet against the market. Last year, when high-yield bonds experienced their worst rout since 2008, an index of credit-default swaps turned out to be a highly problematic hedge that actually indicated a credit gain in value at times while everything else fell.

And of course, investors have to choose what kind of downturn they're expecting. Will it be an all-encompassing systemic seizure that'll be the world's next Big Short? Many hedge funds have dreamed of that day, but it would take some catalyst to create such a scenario, which is all but impossible to predict.

Perhaps the next rout will just manifest as this rolling wave of weakness that's washed over different industries, from energy to retail companies, pummeling specific bonds before moving on to the next spot. In that case, using a broad index to bet against credit won't be particularly fulfilling.

And then, of course, there's the room full of 800-pound gorillas pushing investors toward riskier credit. These gorillas are the Federal Reserve, the European Central Bank and the Bank of Japan, which have pumped enough money into the financial system to mute a lot of the pain that otherwise would've surfaced by now.

So Gross is not wrong in his distrust of this market. But the deck is stacked against him because this rally has proven capable of chugging along despite its repulsive characteristics.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net