TCW Braces Credit Funds For Potential Bond Market Collapse

Jun 23 2015 | 4:22pm ET

TCW Group isn’t taking any chances when it comes to the potential for a bond market selloff at some point between now and the end of the year. 

The investment manager has disclosed that the proportion of cash in its credit funds has reached the highest level since 2008, according to a Bloomberg article. “We’re as defensive as we’ve ever been since pre-crisis,” remarked Jerry Cudzil, TCW’s head of U.S. credit trading, in the article. 

The rationale behind the defensiveness lies in the Fed’s move towards the first rate hike in the U.S. since 2006. The precise timing may be up for debate, but many professional money managers believe a 30-year trend in monetary policy will come to an end when the FOMC finally pulls the trigger.

In particular, policies put in place by the Fed following the 2008 financial crisis resulted in major distortions across global markets. “If you distort markets for long periods of time and then you remove those distortions, you’re subject to unanticipated volatility,” noted Cudzil in the article. 

Also of concern is the lack of liquidity in some corners of the traded credit markets, a consequence of new regulations ironically put in place to lower systemic risk in the financial system. As banks have exited the proprietary trading and market-making businesses, less liquidity exists to absorb large orders and could result in sharp price movements. 

Meanwhile, rock-bottom yields have pushed managers further out the risk spectrum, resulting in what could result in a painful rush for the exits when the tables turn. 

Bloomberg’s article ends with a quote from Cudzil: “We think the market’s telling you to upgrade your portfolio. Whether it happens tomorrow or in six months, do you want look silly before the market sells off or after?”

TCW is one of the largest credit managers in the world, overseeing nearly $140 billion in AUM.


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