Upheaval at the top of Pimco rattled US bond and derivatives markets yesterday as pension funds and other big investors braced for large outflows from the biggest bond manager.

In the first day of trading after Pimco announced its response to the abrupt departure of Bill Gross, its co-founder, some investors decided to get ahead of accelerating outflows by cutting their own exposure to junk-rated and inflation- linked bonds.

The average junk bond yield rose to 6.16 per cent, up from 6 per cent last week, a big move in such a short period. Meanwhile, long-term inflation bonds, signalling inflation expectations for the next 10 years, were pushed below the 2 per cent threshold. to hit their lowest level in 15 months.

Over the long haul, US inflation is seen staying above 2 per cent, and a drop below this threshold in the past has reflected a major market dislocation rather than economic fundamentals.

"Bill Gross was the most public advocate for inflation bonds and the market is braced for redemptions and sales," said James Evans, portfolio manager at Brown Brothers Harriman. "We are seeing selling from levered accounts." – Copyright The Financial Times Limited 2014