Bill Gross's Bullish Brazilian Bond Wager Paying Off in October

  • Bets on Brazil represent three of Gross's top 5 holdings
  • Janus manager had almost a third of assets in Latin America

Bill Gross is wagering the decay in Brazilian credit quality is over -- in the short term, at least. He’s warming up to other emerging markets, too.

His $1.4 billion Janus Global Unconstrained Bond Fund is the counter-party on credit default swap contracts held by investors betting Brazil’s sovereign debt risk will increase. The CDS positions -- maturing in December, March and June -- represented three of his five biggest holdings as of Sept. 30, according to data released this month. Rounding out the fund’s top 10 are similar wagers on Mexico and Russia.

While Gross has for years come out as a backer of debt from Brazil, the 71-year-old billionaire has been stocking up on bullish bets since the end of the second quarter. He joins a small but growing chorus of investors wagering that asset prices in Latin America’s biggest economy are attractive again after political turmoil, a sweeping corruption scandal and a credit-rating cut sent stocks, bonds and the currency into a free fall this year.

Gross’s strategy appears to be paying off in October. The price of six-month Brazilian swaps have declined almost 90 basis points, or 0.9 percentage point, from 267 basis basis points on Sept. 28, which was the highest since at least 2009, according to data provider CMA. They were little changed Friday at 171 basis points as of 1:44 p.m. in New York.

Gross’s fund is also the counter-party on Russian CDS contracts due in December, the ninth-biggest holding. That bet seems to be proving a winner, too, with six-month swap prices there falling to the lowest in more than a year. Both Brazil and Russia, members of the so-called BRIC nations, lost their investment-grade ratings from Standard & Poor’s this year.

The Unconstrained Bond Fund’s seventh- and eighth-biggest holdings represented wagers that Mexico won’t default by June. The fund, which Gross took over in October 2014, a month after he left Pacific Investment Management Co., has lost 1.7 percent this year.

Erin Passan, a spokeswoman for Denver-based Janus, declined to comment on the holdings or the fund’s investment strategy.

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