NEW YORK (Reuters) – According to fund papers and Reuters estimates, PIMCO’s largest investment fund purchased Russian government international bonds and hedged its position with credit default swaps (CDS) in the second quarter-the same period that Russia had a historic debt default.
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A Russia debt investor said that the moves by the U.S. bond giant, which was on the line for a big settlement and sold a lot of Russia CDS, were likely made to soften the blow of the default.
CDS derivatives function as insurance against the default of a borrower.
PIMCO added around $520 million in notional value of U.S. dollar-denominated Russian state bonds to the portfolio of its $120 billion Income Fund last week, according to Reuters estimates based on fund records submitted to the Securities and Exchange Commission last week.
During the same quarter, PIMCO cut its outstanding “sell protection” CDS position from almost $1 billion at the end of March to around $400 million by the end of June, according to estimates by Reuters based on filings.
The moves didn’t change PIMCO’s net position on Russia, but by reducing its CDS seller position, it may have lessened the risk of getting bonds that have lost a lot of value by the time the CDS contracts are settled, said an investor source who asked not to be named.
Most of the time, buyers and sellers of credit default swap (CDS) protection settle their contracts with cash payments or by exchanging the underlying defaulted bonds for the amount protected.
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A PIMCO spokeswoman declined to comment on the trades but stated that the Income Fund’s overall market value exposure to Russian external sovereign debt, including bonds and Russian CDS, has decreased this year.
It was $944 million at the end of last year, or 0.64 percent of the fund’s entire market value, and $357 million at the end of the second quarter, or 0.3 percent of the fund’s total market value.
Since the country’s invasion of Ukraine, Russian bonds have been trading at a steep discount, but they have gained value in recent weeks after the U.S. Treasury let U.S. investors purchase Russian assets on the secondary market and participate in a CDS auction.
The surge may raise the market value of PIMCO’s holdings of Russian state debt. According to the papers, PIMCO purchased roughly $300 million of Russian paper due in 2047 during the second quarter, and this position might have increased from around $70 million at the end of June to $130 million, as calculated by Reuters.
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PIMCO reduced its large position in Russian CDS by purchasing bonds in the second quarter.