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On The Mechanics Of Pimco's Synthetic Treasury Short, And How The Firm Extracted 9,724 Years Of Duration Out Of Cash

Tyler Durden's picture




 

And now a little follow up into Pimco's TRF holdings and real risk exposure. In addition to the previously noted Pimco holdings in Euro$ position (delayed, as the fund does not disclose actual holdings on a monthly basis), below we present the fund's positions that contribute to a substantial negative dollar duration position, primarily contained in various swaps and swaptions. Whereas the fund's euro$ positions are primarily to hedge rate bets in the future, they do add to the fund's dollar duration, and for practical purposes would not lead to a negative DWE number in the TRF. The contributors to negative duration can actually be found in PIMCOs various synthetic holdings, primarily of the swap and swaption variety as seen on the chart below, which however is as of June 30. Since then the dollar duration equivalent of the TRF has plunged which certainly means that PIMCO, while perfectly allowed to do as it wishes with cash, has loaded the boat on swaps and swaptions. Lastly, since PIMCO is likely betting on a massive curve steepening move, this alone means that whether expressed in a  DV01 or carry neutral basis, the firm may have a positive MW exposure while being substantially negative duration and thus risk exposure. One can think of it as two massive offsetting synthetic hedges: the euro$ leg on one side adding duration and the swaption/swap leg on the other, both of which are the true determinants of PIMCO's risk exposure and rate bet. What happens in the cash side is irrelevant: PIMCO can parade that it does not have one cash Treasury short, which would be technically correct, yet be massively short bonds. A comparison could be made to Goldman's declaration to clients that John Paulson was long teh equity tranche of Abacus. Yes, but he was also massively short everything above the equity. And the firm's misrepresentation of this nuance is what the entire legal case against it was based on. We doubt PIMCO will suffer a comparable indignity, however (perhaps at most one or two LPs pulling their capital).

And another curious, if unrelated tidbit, which goes to the firm's efficient (to say the least) use of cash collateral (and exogenous risk exposure). As the chart below shows, as of June 30, 2010, Gross held $234 billion in Euro$ futures and $59.2 billion in long Treasury futures (combined accounting for 125% of the market value of the fund). Yet where it gets tricky is that while factoring for dollar duration on these two futures, and getting a number of $281.7 billion, the collateral pledged against this total number in futures was $28.95 million, or a whopping 9,729.4 years in cash duration.

We have seen how margin hikes impact commodities, whether under the influence of an administration gearing to combat speculators or otherwise. So what would happen if one of those hundreds of IRO contracts up there saw its margin hike? Simply said: PIMCO may find itself in a slight liquidity crisis, especially if the validity of nearly 10,000 years in cash duration is every questioned (by the appropriate authorities). And what is certain is that PIMCO knows this... yet continues to antagonize the administration with Bill Gross' monthly missives which were the inspiration for the Chairsatan moniker, and repeated allegations that the US is a ponzi scheme...

Simply said, something about this very unpleasant worst case risk/return arrangement, or rather the willingness of Pimco to expose itself to this "risk", is rather odd.

h/t J.P. Jr

 

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Tue, 05/17/2011 - 00:13 | 1281899 Hephasteus
Hephasteus's picture

So the dollars got another 10 thousand years in it.
I KNEW IT!!

 

Tue, 05/17/2011 - 00:17 | 1281903 palmereldritch
palmereldritch's picture

That'll be some seriously dirty linen.

Tue, 05/17/2011 - 02:36 | 1282147 Michael
Michael's picture

No, This is seriously dirty about DSK;

Fellatio

Fellatio is oral sex performed upon the penis. It may be performed to induce male orgasm and ejaculation of semen, or it may be used as foreplay prior to sexual intercourse.

Fellatio is also known as fellation, a blow job (BJ), giving head or sucking off.

http://en.wikipedia.org/wiki/Fellatio

Tue, 05/17/2011 - 05:23 | 1282228 spiral_eyes
spiral_eyes's picture

dsk was stitched up by the zoellick/rockefeller/paul ryan faction who want to end the great keynesian experiment and move into the new world order. and the most salient surprise will be the re-instatement of the gold standard, the end of the euro (dsk was its staunchest defender) and open-faced corporate fascism in america. koch brothers and murdoch are playing along. this wing of the elite have finally realized the fiat ponzi hurts them more than it benefits them, by discouraging overall productivity. the other wing are clutching on for dear life.

 

i'm sick of the keynesian/rothschild/obama/bernank experiment, anyway. every dollar silver goes up isn't profit, it's just dessication of everything else, drowned under a tidal wave of fiat. i know my enemies' enemies are not necessarily my friends, and they certainly won't end the iron triangle, or let ron paul serve as president, but the alternative presented by the rockefeller faction is vastly preferable to any of the rothschild faction, the communist party of china, or vladimir putin. 

Tue, 05/17/2011 - 05:35 | 1282234 Sophist Economicus
Sophist Economicus's picture

Agreed. BTW, how is the weather on Alpha Centauri?

Tue, 05/17/2011 - 00:23 | 1281928 JohnG
JohnG's picture

I take clients through bankruptcy, and I see large outlier numbers like this all the time.

This is *very* odd indeed.

Tue, 05/17/2011 - 00:25 | 1281940 I am a Man I am...
I am a Man I am Forty's picture

no comprende

Tue, 05/17/2011 - 01:15 | 1282036 Sophist Economicus
Sophist Economicus's picture

It's quite simple. The swapation, a synthetic, also created by Dow chemicals and similar to polyester, is used to wrap the one leg of the dollar butterfly collar. The underlying, made of cotton, is hedged with unlaundered euro-dollars to create the other leg, made synthetic by the addition of rayon to the linen.

Add this to Pimco's other positions, and the jive boom no longer fits with the jib hatch, exposing them to excessive wind. Which equates to higher betas than would seem sane.

Call me if you need a private tutoring session in finance

Tue, 05/17/2011 - 01:30 | 1282060 asdasmos
asdasmos's picture

Where can I reach you?

Tue, 05/17/2011 - 01:32 | 1282065 I am a Man I am...
I am a Man I am Forty's picture

ok, i'll be specific, i don't understand why cash collateral is needed on the futures when the value of the futures can just go down, also, don't understand what they mean by extracting 9,724 years of duration out of cash

Tue, 05/17/2011 - 01:42 | 1282079 JohnG
JohnG's picture

I like scotch too!  :)

Hiccup.

Tue, 05/17/2011 - 01:44 | 1282082 Prof Gulliver
Prof Gulliver's picture

Oh stewardess, I speak jive.

Tue, 05/17/2011 - 02:24 | 1282140 bonddude
bonddude's picture

Tyler and the rest of you are killin' me. Bwwwwwaaaahahaha

Tue, 05/17/2011 - 00:31 | 1281951 unrealrally
unrealrally's picture

This is June 2010 you say. Numbers almost a year old. I do think back them Gross was all about not fighting the Fed.. and has jumped ship since then. I'd not be surprised if these numbers look very very different now.

Tue, 05/17/2011 - 02:07 | 1282120 jeff montanye
jeff montanye's picture

ya think?  but the antagonizing of the fed which pimco so clearly front ran for so long is curiouser.

Tue, 05/17/2011 - 03:20 | 1282172 Breaker
Breaker's picture

"...but the antagonizing of the fed which pimco so clearly front ran for so long is curiouser."

I agree. It's not just the Fed. It's the Chicago boys that run the administration. They play hardball. Wouldn't it be a better strategy to shut up and just do what you think is best for your investors rather than inviting revenge from a group who are running out of fingers to plug the holes in the dikes?

Tue, 05/17/2011 - 03:38 | 1282183 StychoKiller
StychoKiller's picture

Perhaps Pimco is sitting on a large amount of CDSs, written against their own company, and trying to goad the Fed into triggering them...crazier things have been going on, in my estimation.

Tue, 05/17/2011 - 00:39 | 1281967 bob_dabolina
bob_dabolina's picture

Seems pretty normal to me

-AIG FP Quant

Tue, 05/17/2011 - 00:42 | 1281980 Korg
Korg's picture

This is why the system needs to DIE.  A man of average intelligence can't understand all this crap

swaps....swaptions!?....Synthetic hedges???!

Synthetic means not real!

Use enough bullshit words and phrases and you can rob the taxpayer blind!

I call Bullshit!

We need to have the people demand that you call a spade a spade and demand that all investing be understood by an average HS grad.

You either are investing in a company/Govt. or not.

This is all related to derivatives which will bring down the entire world soon. May God not have mercy on their souls.

Tue, 05/17/2011 - 01:09 | 1282022 JohnG
JohnG's picture

"You either are investing in a company/Govt. or not."

 

And then there's gold.  Buy some gold every month.  Some silver as well.

Do this as a planned cash purchase.  DO NOT buy on credit.

Get the metal, and put it in a bag.  (As my brother likes to say.)

Bars, rounds...does not matter.  I am partial to Eagles so that's what I buy for physical.

My favorite place is gainsville coins....no affiliation, but they are a good company.

Just do that.

More reading:

http://www.zerohedge.com/article/its-going-implode-buy-physical-gold-now...

 

 

 

 

Tue, 05/17/2011 - 01:39 | 1282072 JohnG
JohnG's picture

And see this which is very nice:

http://www.store.firstmajestic.com/

 

Tue, 05/17/2011 - 12:48 | 1283457 DosZap
DosZap's picture

John G,

Very Nice?

$6.00 Premium on Silver?.

Todays price on Silver $39.50??

Their insane.

Tue, 05/17/2011 - 12:53 | 1283463 DosZap
DosZap's picture

*

Tue, 05/17/2011 - 02:33 | 1282144 Sock Puppet
Sock Puppet's picture

Great advice.  "Get the metal, and put it in a bag."

Tue, 05/17/2011 - 01:18 | 1282034 Oracle of Kypseli
Oracle of Kypseli's picture

"This is why the system needs to DIE"

We can make it happen. Let's keep buying physical gold and silver and get out of any paper assets, whatever they are called.

Dollars only for your monthly expenses and your everyday needs. Save save save.

Tue, 05/17/2011 - 01:16 | 1282037 hack3434
hack3434's picture

You are looking at the unfortionate, unintended outcome that came with the end of the Cold War. Many out of work physicists found that they could make a nice, cushy living by quantifying risk for Wall St.  

Tue, 05/17/2011 - 07:16 | 1282275 Urban Roman
Urban Roman's picture

Use enough bullshit words and phrases and you can rob the taxpayer blind!

I call Bullshit!

Long pitchforks.

Also soap, toilet paper, land and metals.

Tue, 05/17/2011 - 00:47 | 1281986 groggory
groggory's picture

Most likely..outdated numbers here. 

Tue, 05/17/2011 - 01:10 | 1282019 disabledvet
disabledvet's picture

what's a "swaption"?  sounds like something swingers do.  kind of like a "stoptional."

Tue, 05/17/2011 - 01:13 | 1282030 JohnG
JohnG's picture

Mostly interest rate swaps from what I've gathered.  That's the 9000 pound gorilla in the room.

http://www.investopedia.com/terms/s/swaption.asp

 

Tue, 05/17/2011 - 01:47 | 1282084 disabledvet
disabledvet's picture

is that like wife swapping then?  i hear people in California do that too.

Tue, 05/17/2011 - 01:54 | 1282101 JohnG
JohnG's picture

To me, it just depends.  Give me a tall blonde...and whatever.

Wierd esoteric mathmatical model finance.

Add that and you get: Tall Blonde Model.

That's the ticket :)

Tue, 05/17/2011 - 01:18 | 1282035 catch edge ghost
catch edge ghost's picture

I remember Gross was asked to be the spoonful of sugar when TARP rolled out.

He spoke of necessary evils and made this sort of sad, frustrated face into the camera. It was hard to watch, like bad high school theater.

Now he's asked to play the vigilante.

Tue, 05/17/2011 - 02:08 | 1282119 Catullus
Catullus's picture

http://www.cmegroup.com/education/files/Eurodollars-as-Risk-Mgt-Tool.pdf

This is a good overview if you're interested.

Tue, 05/17/2011 - 07:36 | 1282289 jm
jm's picture

One could argue that the negative duration acts as a hedge on their other holdings-- agencies, IG, HY. 

Looking around a bit, some of this is to manage exposure to the yield curve.  But another part of it is to express PIMCO’s expectations for future rates.  It is a short position no doubt.

 

Tue, 05/17/2011 - 11:17 | 1283051 trav7777
trav7777's picture

this is a total WTF for anyone thinking they're investing in a "mutual fund"

Tue, 05/17/2011 - 12:44 | 1283438 DosZap
DosZap's picture

OT,

Bill Gross blames ZeroHedge...................

 

 

http://www.cnbc.com/id/43046632/

 

 

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