Pimco Offloads $40 Billion In Treasurys, As Frontrunning Fed Creates Billions Of Profits; Gross Does Not Expect QE 2 On Sept. 21; Pimco's "Fed Frontrunning" Tell Exposed
As we pointed out last month, in June and July Pimco raised its allocation to government bonds to the highest ever, or 63% and 54% of its then-$239.3 billion Total Return Fund. As a reminder this is when the 10 year was well above 3%, and which proceeded to plunge in yield (soar in value) in August, as the sheer panic of QE Lite (and what it means for QE 2) enveloped the market, and when the Hindenburg Omen correctly predicted a 5% drop in stocks beginning in August 12. Stocks have now risen by over 7% in September, which was to be perfectly expected considering the market has seen $10 billion in redemptions (don't ask... bizarro), yet bonds have only gradually sold off, and as rumors of QE persist, the 10 Year continues to be just off its all time tights. This may change now that it has been made clear that Pimco sold over $40 billion in UST bonds in the month of August, just as bonds reached all time highs. Yet to get the sense of urgency behind Gross' earlier actions, consider that the bulk of the purchases were done on margin (pink line in chart below) as the fund borrowed $35 billion in June (and $29 billion June), using all the borrowed cash to fund Treasury purchases. And since the cash repo rate would have effectively wiped out the carry profits on the bonds, it is now blatantly obvious that Gross was very well aware there would be a massive capital appreciation in Treasuries beginning some time in July or August (cough QE Lite cough), and was actively buying all he could on margin in advance of the move. That's right, ladies and gents - we have just discovered Bill Gross' frontrunning "tell" - 1-2 months before every Fed intervention, he loads up the securuity that will benefit the most from any particular round of QE using borrowed cash. As the effective duration of the fund increased substantially in June and July it is obvious that Gross was buying up the long end of the curve, expecting a major flattening of the curve. Which, once QE Lite was announced, is precisely what happened. Incidentally, this purchasing on mega margin was repeated by Gross just once before: when Pimco's holdings of MBS surged from $80 billion to $113 billion in January 2009... just before Ben Bernanke announced QE1. What a series of lucky coincidences!!!
One wonders just how much insight into Ben Bernanke's actions the Newport Beach man had to take such a major gamble on the 30 Year at a time when it was already approaching record lows. Hopefully, one day when someone is combing through the ruins of Fashion Island's world's once largest credit fund and uncovers the phone logs, they will be kind enough to inquire how many calls to and from the Liberty 33 trading desk were made by the man with the 7 Bloomberg monitors.
Anyway, Gross' fund is now back to its boring old self: its TSY exposure is just 36% of total, as MBS has increased to the highest since September 2009, just before QE1 ended.
This time we have decided to frontrun Bill Gross, who is now frontrunning the Fed - Pimco has once again begun loading up on the security class that benefited the most from a "Big Bang" type of QE announcement - MBS. We expect the September announcement to show this class allocation to have grown to at least 25 (and much more if Gross is once again buying on margin).
And the fact that Gross did not use margin cash to bid up MBS means that the Fed will most certainly not announce QE2 next Tuesday. MS was correct in recanting. Whether this will be the case next month, as Gross looks at the November Fed meeting is unclear. If he does though, we will "guess" that his track record of predicting major Fed moves will move to 3 out of 3.
Pimco holdings by product type:
Pimco holdings by maturity and average fund duration: