Gross Increasingly Cautious About MBS, Big Fan Of Canadian Bonds And Economy

Tyler Durden's picture

An increasingly cautious Bill Gross joins his yet more pessimistic colleague El-Erian, in noting that disruptions to the MBS market may be severe post March 31, primarily as a function of concerted liquidity withdrawal by not just the Fed, but central banks across the globe. Not surprisingly, Gross would like to see a very small investment by Germany in its Greek bailout so as not to impair PIMCO's existent Bund holdings. Yet Gross is sounding surprisingly timid on future German sovereign debt prospects, which has now been singled out as the least of all evils (hardly the most glowing endorsement) except for Canada. Is PIMCO now hoarding not just Brazilian, Polish, Russian and German bonds, but aggressively acquiring Canadian treasuries as well? Rosenberg will be happy.

Gross does not believe Lacker's posturing that the Fed will dispose of assets any time soon.

There is going to be enough pressure on rates simply by stopping the purchasing of mortgages at the end of this month. The selling of them would put substantial pressure.

On global QE:

The additional factor to consider is that other central bankers, the BOE, the ECB and even the BOJ are all pulling back in terms of their QE measures at almost the same time. Together they have provided $2-$2.5 trillion worth of purchasing power to replace what's disappeared in terms of the shadow banking system. We should all be concerned. This is really the first step in terms of tightening, not monetary tightening, but tightening in terms of credit and so we need to wait for 3 to 6 months to see what the effect is not only on interest rates but on economic growth going forward.

Gross' observations on European bailouts, and his response whether recent developments make him more apprehensive about his German bet:

"I think it does. We would prefer to see a lower bailout as opposed to a higher bailout. The number mentioned this morning has been in the €5 billion category for Germany alone, but the extend to which individual countries' balance sheets are contaminated by guarantees and extensions of credit yes, that leads to questions in terms of sovereign viability down the road. The U.S. has a substantial portion of its own balance sheet contaminated by agencies, Fannie and Freddie and the like going forward, so Germany is not alone. Canada is probably in the best shape in terms of all those guarantees and contingencies. PIMCO and the rest of the world can't all buy Canadian government bonds, but it's a start."

What Gross will do now in Germany after his recent vocal endorsement of Bunds. He surely does not sound too enthusiastic any more.

What we would do in Germany is basically buy the front end of those yield curves that are predicated upon the potential for the ECB to raise rates. We think that that's certainly not the case. They won't lower rates, but simply keeping the rate at 1% should lend support to the front end of those yield curves.

And lastly, as a follow up to his earlier letter:

Sovereign bonds are moving to the credit space. It means that Greece, six month ago, where an investor in the sovereign space would have been dependant on interest rate changes and monetary policy, is now dependant more on the creditworthiness of the country. So there is a morphing, there is a transition between interest rate space into more credit space, where the viability of the country's at stake.

Full Bloomberg TV clip:

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wpw's picture

should that be least of all evils?

Stranger's picture

Canada's economy is a huge housing bubble, bigger than the US' bubble circa 2006.

Captain Willard's picture

This is an under-reported issue, one which I would love to hear David R. or Leo discuss. Thanks for bringing it up.

Anonymous's picture

I don't understand how it can be bigger than the bubble in the US. In Canada, mortgages were never given without proof of job and proof of income. So, mortgages weren't handed out like candy. I agree, that there might be a housing bubble, but I can't see how it can possibly be worse than in the US.

ghostfaceinvestah's picture

Except all mortgages in Canada are adjustable rate, usually after 5 years, whereas in the US, even at the height of the bubble, over half of all mortgages were still fixed rate (15-30 year).

Anonymous's picture

No they aren't. What a crock. Mortgages in Canada can be fixed rate, adjustable rate, whatever the consumer wants. And in Canada, whether the mortgage is insured or not, the lunacy of lending 120% of the value of the home without proof of citizenship or without proof of even holding a job simply never happened. Contrary to the garbage you just spewed here, the majority of Canadian mortgages are fixed at a low rate. I hate to tell ya, but when mortgages can't possibly go any lower, Canadians aren't in the habit of taking out ARMS. Do you think they're nuts or something?

Anonymous's picture

Most Canadian fixed-rate mortgages are only for 5-year terms. You can get 7 and 10 year terms, but almost nothing beyond that. So I think the closest parallel is an Option-ARM, in that you've got your current, low interest rates for "X" time, and then when the term is up, you go back to the bank and hope the rates are still low...

Tell me how that will work out in cities like Toronto and Vancouver in 2012 and beyond, considering that many mortgages there are 5% down/35 year amortisation, and keep in mind that Canadian mortgages are recourse loans; no strategic defaulting here.

Dark Helmet's picture

Not quite nationwide, but Vancouver looks like California circa 2006.

the grateful unemployed's picture

ask Greece what the post Olympic party is like? For that matter how is the housing bubble in Bejing?

Anonymous's picture


if I think the Canadian housing bubble is going to pop soon. How would you trade?

I am just a retail investor and cannot put together a synthetic mortgage CDO and sell it to somebody who is stupid enough.

Short residential REITs or property developers? Most are still down after the crash. What else?

SteveNYC's picture

The two "healthiest" western countries, Canada and Australia, have housing bubbles of epic proportions.

If the commodities game unwinds, which it might depending on: 1) China's viability to keep purchasing at this pace (iron ore etc.), 2) Another disruption/flight to safety (almost a guarantee given how many balls are being juggled right now) these will explode and will be heard around the world a la Krakatoa.

A Nanny Moose's picture


I keep hearing/reading that too. This is interesting since many people seem to consider Canada's banking system more tightly regulated than here in the US, thus far more sound.

So how does a bubble develop in this petri dish, if de-regulation is to blame?

Stranger's picture

Canada's banking system is 100% insured by the CMHC (, which is Canada's equivalent to Fannie Mae. Canadian banks take zero risks issuing mortgages, and earn all the profit.

Anonymous's picture

That's funny. The mortgage on my house in Canada that is not CMHC-insured. Ya might want to check your facts before posting, eh?

Anonymous's picture

I'm guessing you got a GEMICO insured mortgage you took for next to no down payment and a 40 year amortization. They don't do that anymore.

It's interesting that the sub prime mortgages are all pretty much insured by private sector - as if these guys are really going to cover them all when the bubble bursts?

Stranger's picture

CMHC is public sector.

Anonymous's picture

You're out to lunch Stranger.

Anonymous's picture

Garth Turner (from the aptly named GreaterFool), Mish and David Rosenberg are among a few pundits who are bearish on Canadian housing. Apart from trying to compare Truro Nova Scotia with West Van, Muskoka with Lake of the Woods or Toronto's Leaside with Calgary's Aspen Woods (sort of like trying to compare Dallas with Ft. Myers), the reality is that no markets in Canada saw a 400% increase in prices (maybe 100% if you're lucky)during the past decade. The US market was driven by frenzied speculation facilitated by liar loans, interest only mortgages and the rest of the sub-prime toxic soup, all peculiar to the US market. The huge overhang of inventory and shadow inventory in many US markets is nowhere to be found in Canada. The dismal economic recovery in the US is not much better than in Canada but make no mistake Canada is in far better shape. To suggest that "Canada's" real estate market is due to implode is likely a wish of those who have been frozen out of that market but it is not reality. Canada is not the US. Will prices soften, perhaps but crash, highly unlikely.

Cognitive Dissonance's picture

It seems that Bill is increasingly dissatisfied with the girl he brought to the dance. He seemed to be having a grand old time when he hooked up with the government last year. But now that the hangover has set in and things are getting decidedly worse, poor old Bill suddenly finds ugly red pimples and knobby knees to complain about.

What a piece of work, all disguised as "bidness". 

4shzl's picture

LOL.  The guy's in love with his own voice, and seriously overexposed in the MSM.  But since PIMPco is big enough to make its own weather, he's also impossible to ignore . . .

IBelieveInMagic's picture

Since PIMCO has reduced exposure to MBS thinking that game was tapped out, Bill and PIMCO have moved on to other asset classes. Now he can safely diss MBS.

The same ole pump and dump and talking book.


Anonymous's picture

Gross is bending over and kissing his ass goodbye!

Mr Lennon Hendrix's picture

Inflation is not low....

Anonymous's picture

Tyler :

Do you think us readers have no memory ? You begin to embarass yourselves with this drivel about Bill Gross getting even MORE negative on GSE mbs .

This is about your 20th article on Bill Gross screaming from the rafters to SELL SELL SELL ( to borrow a Cramer phrase ) your GSE mbs because the Fed will soon stop buying in the last 6 months . You degrade ZH by running same story / theme over and over and over ( does Bill Gross have pictures of you with barnyard animals ? why else this need to run same old story as 'BREAKING NEWS' to try and help Gross ? )

Do you not think the markets don't know this and that many joined Gross getting short out the whazzooo GSE mbs at cheaper levels and now face the prospect of having to cover the short at the highs ?

Do you not realize that demand for new mortgages is plunging and that we just had worst new homes sales announnced in over 50 years ? and that the Fed is NOT going to sell what it has bought because its making billions on the carry trade itself ?

Stop being Bill Gross's shill ....... the story is old , you've run it too often , and it grows obvious you have something else motivating you to flog it again and again ....

Ned Zeppelin's picture

Somebody got out of the wrong side of the bed this morning. 

ghostfaceinvestah's picture

The Fed is buying 70% of new issuance, the MBS market is going to crater once they stop buying.

Cognitive Dissonance's picture

"The Fed is buying 70% of new issuance, the MBS market is going to crater once they stop buying."

Which seems to imply a few things. Either they won't stop buying, continuing purchases on the QT or publicly extending QE. Or they stop and crater the market, thus destroying their "resurgent economy". Or walk a fine line between the two.

No matter what, there is a bridge abutment up ahead. It will be hit. Either they increase the mass of the vehicle so much before it hits that the vehicle simply pushes through like a fat man at the buffet (with some but not total damage) or they come to a near instant halt in .0001 seconds.

They have been able to finesse the middle road for decades and I sincerely believe they believe they'll be able to do it again. We shall see.

Anonymous's picture

"Or walk a fine line between the two."

That is one awful long looking line they'd have to walk.

My bets are on at least a dozen QE measures yet to come in terms of a parachute to try and cushion the fall once the balance act gets too difficult.

What other option is there for any central bank? The raison d'etre for a central bank is to provide cash to the economy. Politicians no matter where or what background will always put massive amounts of pressure on their one tool to avoid a collapse and possible anarchy which is the central banking system and fiat.

Everything else is just chatter.

Cognitive Dissonance's picture

To use a popular political term, I mis-spoke. Upon reflection, the fine line isn't so fine. The Fed is constantly adjusting various levers and control valves. To continue buying some on the sly would actually fit in nicely with their MO.

I'm not saying we are going back to "normal" (and I defy anyone to define "normal") but we aren't going back to what we had 10 years ago. I suspect as the economy stays extremely shaky and things vibrate between "better" and "worse" (two more terms I defy anyone to define) I think the idea of inflation, even severe inflation, will become more palatable, in the same way torture was outrageous in 2003 and now it's considered at worse part of the background noise of war.

Not saying torture is good, only that the average person has been convinced through mind control hive mentality propaganda that it's needed, as long as it's the neighbor who is tortured and not himself.

ghostfaceinvestah's picture

They'll stop buying for a few weeks, but once they see the market crater, they will jump back in.  They have no choice at this point.

Cyan Lite's picture

Assuming they do stop buying...

I expect QE 1.5 to be announced at any moment now.  Not 2.0, but just an extension of buying MBS and expanding it to $2 trillion or something from now until December.  The $75b loss at FNM pretty much guarantees that.

Anonymous's picture

Bernanke will save that announcement for the next time stocks try to go down. With the Russell hitting new highs for the year there is simply no need.
Save that gunpowder for the next selloff.

mkkby's picture

Yep.  Watch out right before options expirations.

Anonymous's picture

the euphoria surrounding Canada is a result of Canada winning the gold medal hockey game last night vs. USA, and nothing else. Sadly, this is the most distinct fundamental link I have seen drive USD/CAD in a while. Similar comparison to the US hockey team in 1984 and its implications regarding the cold war, on a much smaller scale. Based on this analysis I think we will be OK until China #1) forms a hockey team and #2) that hockey team wins a gold medal (provided that china was not actually hosting the game).

FranSix's picture

You may get price appreciation in Canada bonds, but the only buyers will be the commercial banking sector, or pension funds based in Canada. Look at Swiss long term rates, they're like Japan's now. Canada also has a derivatives exchange which doesn't even make it into the business pressCanada now has a chronic deficit after bailing out brokerages exposed to ABCP(Asset Backed Commercial Paper.) You'd think that the government would have learned its lesson after that fiasco. But, 35-year @5% down mortgages are being stamped out with wild abandon.

The holders of Asset Backed Commercial Paper were given "bonds" which are the euphemism which the press uses when referring to derivatives. . This is essentially what the Canadian government is propping up with taxpayer dollars, and gone from a massive $60b. surplus to a $150b. deficit. The money was spent propping up PENSION FUNDS AND BROKERAGES gambling in the derivatives trade. Those pensions are probably insolvent, and the brokerages are absolutely flush with cash. But the derivatives are all off balance sheet.

Canada also has absolutely NO GOLD in its central bank, being sold to Goldman Sachs in 1994.

If the loonie drops, especially against the U.S. dollar, then this would make any investment in bonds very questionable.

Canada's housing is in a bubble because they changed the regulations to allow substantial legerdemain, where mortgages can be packaged just like bonds. It doesn't matter about the quality of mortgages, once you have equity in your home, you use it to pay for that SUV or your kid's hockey involvement (18k/yr). Or reno, what have you. The Alt-A is set to go off, and they are considered the quality mortgages. So I would presume that Canada's housing debacle is going to go along with the Alt-A. Once housing goes, there goes the economy, and it doesn't matter how good the mortgages are.

Anonymous's picture

Again FranSix you are talking out your a*se. Most mortgages originated by Canadian bansk stay on their balance sheets. Second, Canada did not bail out ANY financial institution in Canada as none needed bailing out, get your facts straight or take your meds before you post. Third, the reason Canada's budget deficit increased is pretty simple: reduced income (ie less taxes) and increased infrastructure spending, also there was a reduction in the GST and Corporate tax rates. Finally, the Government has not spent one cent on the ABCP restructuring in fact it is earning a fee on a standy ine of credit.
It's fun to try and talk like a grownup but you should think hard before posting your misguided rants.

Anonymous's picture

You bearish gloomers are WRONG! Eat it Gross! CNBC has a new face, interviewed Buffett who said "We're winning the war." The cycle has turned. Our credit is backed by the full faith & credit of the US Govt, backed by nuclear war heads. Ever since we've gone off the gold standard, approximately every 8.6 years the cycle turns. Bulls who got on last March are/will be VICTORIOUS!

Anonymous's picture

Ben, is that you?

Stevm30's picture


Please, pretty PLEASE don't raise interest rates Ben!

buzzsaw99's picture

Without his fascist connections gross is merely average.

Anonymous's picture

For me the tell was the admission of idolizing Baruch, but I have to say your position is likely quite difficult to defend.

sawyer's picture

While Canada's deficit seems small compared to other G20 countries; if one's includes the Provinces' budget deficit (Ontario and Quebec in particular) then debt ratio to GDP  surpasses that of France and GB and approaches that of the US. It probably equals that of the US if one's include all of Canada's entitlement programs such as free healthcare, pension liabilities, and other social benefits.

   "A report by the Quebec Ministry of Finance reveals some incredibly troubling findings.
The province, buoyed by billions of dollars in annual transfer payments from Ottawa, is deeply in debt. How deep? Try $285-billion . . . that’s a heck of a hole, especially when you realize that the rest of the country is funding its social and economical agenda.

To put this into perspective; Quebec’s total debt is graded at 94-percent of its Gross Domestic Product. Greece, the country that through its spend-crazy government has triggered a near state of panic in the European Union, has a lower percentage of debt-to-GDP. What does that say about the province? What does the rest of Canada have to say about this?

The findings are incredibly troubling and should serve as a wake-up call to everyone outside Quebec. This is surreal – and we are basically enabling Quebec politicians to take our money and subsidize their citizens’ lifestyle."




Stranger's picture

Yep, it looks like Quebec and Greece are pretty much in the same abyss, according to this guy anyway:


An insane debt, insane bureaucrat entitlements, no hope for the young, corruption throughout and collapsing all-around institutions.

Anonymous's picture

You forgot to mention Alberta. The only state or province on the face of the planet who have no debt. NO DEBT!

Anonymous's picture

anybody who believes Gross should be shorting the hell out of MBB ( its the GSE mbs ETF ) .....funny how its lingering within 1% of alltime record highs while corporate bond , US Treasury , and all other bond ETF well off their recent highs .......... shouldn't guys like Gross and all the smart hedgies be shorting it like crazy given every fool knows GSE mbs are dead when Fed stops buying ?

Anonymous's picture

anybody who believes Gross should be shorting the hell out of MBB ( its the GSE mbs ETF ) .....funny how its lingering within 1% of alltime record highs while corporate bond , US Treasury , and all other bond ETF well off their recent highs .......... shouldn't guys like Gross and all the smart hedgies be shorting it like crazy given every fool knows GSE mbs are dead when Fed stops buying ?

AbbeBrel's picture

>  The U.S. has a substantial portion of its own balance sheet contaminated by agencies

Ahhh contamination, j'adore ce mot.

You can only eat what’s in the cafeteria, and right now the cafeteria doesn’t have anything particularly appetising in it.   Paul McCulley Discusses PIMCO’s Cyclical 2010 Outlook  [Dec 2009]

When everything has some "merde" in it - the question becomes what has the least amount and made by the cook is least likely to have stirred in some even nastier bits into the recipe.   What is wrong with being a bit picky, trying one thing and then deciding that this is not to one's taste - and that one should try a something a bit different.   C'est naturel.