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Of course, it isn't just big guns like Gross who have the power to move markets and cause interest rates to spike. Many bond traders are like Brian Edmonds, head of Treasury-bond trading for Banc of America Securities. Blond, trim and a former Harvard lacrosse player, he sits at his desk all day interpreting economic data and trying to predict what the zig-zagging numbers might mean for the market. When claims for unemployment benefits ticked higher last Thursday, it suggested weakness in the economy. Investors promptly bid up bond prices. But Edmonds saw hidden strength in the news. He sold $100 million of T-bonds, just before the market reversed and proved him right. "Volatility creates opportunity," Edmonds says.
Opportunists like "Edmo," as trading pals call him, sit in the pits at hundreds of firms and move the market in increments every day. But it's the relatively few heavyweights like Gross--others include the Soros hedge funds and institutional managers such as BlackRock--who create sustained moves as they constantly position their portfolios for the unknown. People planning on refinancing or buying a house would do well to listen to what Gross has to say. For one thing, he says the unprecedented interest-rate volatility seen of late is now a permanent bond-market reality because of the nation's mushrooming use of credit. As banks, pension funds, insurers and finance companies trade debt to manage their exposure to interest-rate risk, speculators are encouraged to jump in, heightening volatility.
There may be good news in all this. Much of the recent increase in interest rates has been technical--giant mortgage holders like Pimco, Fannie Mae, Freddie Mac, Chase and J.P. Morgan have been selling T-bonds in a complex strategy that helps to shield their vast mortgage holdings against risk. But despite signs of economic recovery, Gross believes bond yields will settle in at current levels--meaning mortgage rates will settle here as well. "We're done selling," Gross says. At least for now.
--With reporting by Sean Gregory and Jyoti Thottam/New York