Key to economic recovery may be in California

The credit crisis, though, has created discord in this usual slow-and-steady crew. Some top players are criticizing rivals' tactics. And for the first time in years, different strategies applied by managers are leading to large performance gaps. Several bond firms in the area turned in mixed performances last year, a few losing 10% or more. Some better performers smell blood, hoping clients will defect from the larger firms.

TCW's Gundlach says some of the larger bond firms have exposed their clients to outsize risks by playing in the bond derivatives market. Some of these firms placed complicated trades binding them to buy bonds at preset prices in the future. By using these contracts, rather than buying bonds outright with cash, some managers boosted short-term returns by taking on additional risk, he says.

Investors, stunned by their losses last year, will likely move their money from larger firms that bet wrongly on these derivatives, Gundlach says. "How can you not give up on them? They're supposed to be credit experts."

Western Asset's Ken Leech, who was chief investment officer until taking medical leave last year, doesn't deny the year was tough. But Leech, now working as a strategy adviser for Western, says the firm has the experience to navigate through the crisis. And while the firm uses derivatives, he says they're common in the industry, and they can allow clients to benefit from corners of the bond market that normally would be too small to dabble with.

Meanwhile, the region's bond investors are braced for what could be an even more difficult year in 2009. Being too aggressive could lead to another big year of losses. But being too cautious could mean missing out on historically high yields and seemingly once-in-a-lifetime prices. "A lot of pension funds and endowments are in a state of shock," says Rodriguez, who, despite his fame as a conservative bond investor, races Porsches on the weekends. "This year will be much more challenging."

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