Bloomberg: Big money manager gets ready for big bond-market selloff. And it's not alone

“We’re as defensive as we’ve been since pre-crisis,” says Jerry Cudzil, head of U.S. credit trading at TCW Group Inc., Los Angeles-based money manager, which oversees almost $140 billion of U.S. debt.

The group has been accumulating more and more cash in its credit funds, with the proportion rising to the highest since the 2008 crisis, according to Bloomberg.

“We never realize what the tipping point is until after it happens,” Cudzil said.

The money manager isn’t alone in its fears.

As FTN Financial reported, referring to Investment Company Institute data, bond funds are holding about 8 percent of their assets as cash-like securities, the highest proportion since at least 1999.

As Cudzil explains, the U.S. central bank is moving toward its first rate hike since 2006, and the end of record monetary stimulus will be of great concern to many investors who pumped cash into risky debt to try and get some yield.

Changes in policy come when a global background is far from being bright.

The Chinese economy is hampering, the outlook for developing nations has grown cloudy, and there are politico-economic turmoils in the eurozone.

Undoubtedly, the Fed will try to dishabituate markets for the old easy policy.

Their ideal scenario for the Fed would be to raise borrowing rates slowly so that debt investors got used to losses and corporate America could adjust to debt that’s a little less cheap amid an improving economy.

However, Cudzil admits this scenario is hardly possible, as volatility in the bond market climbs.

“If you distort markets for long periods of time and then you remove those distortions, you’re subject to unanticipated volatility.”

In his opinion, investors’ inability to quickly trade bonds will also increase price fluctuations. New regulations have made it less profitable for banks to make smooth the wheels of markets that are traded over the counter and, as a result, they’re devoting fewer traders and money to the operations.

In addition, record-low yields have driven investors to pour money into the same types of risky investors - so it may be even more painful to get out with few potential buyers able to absorb mass selling.