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What The Rout In MBS Means For Pimco And Broader MBS Investor Alternatives, As The Market Wakes Up To Risk

Tyler Durden's picture





 

Wonder why various PIMCO funds are getting hammered over the past week? Simple: the fund's recent push into mortgages, especially on margin, has backfired, and courtesy of the surge in mortgage rates which we highlighted yesterday, has left the world's biggest bond fund, second only the Federal Reserve, hoping for a last minute Hail Mary (Pimco can't print money unlike the former). As a reminder, while Pimco's TRF is positioned well to benefit from the steepening in the 2s10s courtesy of its 4.86 effective duration, we are unsure how the massive flattening of the 10s30s is impacting the firm. What we are absolutely sure of, is that the plunge in MBS prices in the recent week has left the fund gasping for air. Recall that the TRF has increased its MBS holdings by $50 billion in the prior two months (and likely continued in November), which is why the entire rates complex must prevent the ongoing rout in 10s and 30s as otherwise the negative convexity threatens to force an avalanche of selling first by the PIMCOs of the world, then everyone else. We present some very relevant commentary out of CRT on the MBS crunch conundrum.

From CRT:

MORTGAGE INVESTORS HAVE BEEN MORE SURPRISED BY THE TIMING AND MAGNITUDE OF THE RECENT INCREASE IN INTEREST RATES, RATHER THAN THE UPWARD DIRECTION. The sharp spike since just the end of November (6 trading days) has caused the effective duration of the overall Agency mortgage index to extend by a full year, or 38%. From an analytics perspective THE UP-IN-COUPON TRADE HAS BEEN HARDEST HIT, WITH "NEW" CONVENTIONAL 5.0% ISSUES LENGTHENING IN DURATION BY 54% (Yield Book data). Portfolio managers are in an especially tough position given that the move has occurred so late in the year. DO THEY NOW SET UP FOR 2011 WITH AN EXPECTATION THAT THE CURRENT TREND WILL BE SUSTAINED, ACCELERATE, OR BE REVERSED? Investors recognize that while "official" rates may remain close to zero, the rest of the curve is vulnerable - whether due to a better economic outlook or deficit pressures. There are several approaches to addressing such a view within a securitized products context - from resetting positions within the coupon stack, to adding more structure (CMOs/CMBS), TO LEAVING FRESH CASH ON THE SIDELINES THROUGH YEAR-END AND/OR UNTIL YIELDS MORE FULLY REPRICE.

 


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Thu, 12/09/2010 - 12:24 | Link to Comment Insiderman
Insiderman's picture

Oh, no, my ZH friends.  PIMCO has not failed because the Fed stands ready to defend with QE3.  Join my FB community page: http://www.facebook.com/pages/Stop-QE3/170960956269894

Thu, 12/09/2010 - 18:09 | Link to Comment Bob
Bob's picture

Nice idea. 

Thu, 12/09/2010 - 12:26 | Link to Comment SheepDog-One
SheepDog-One's picture

PIMPCO funds are getting monkey hammered? Whatever you do dont tell RoboTrader, he's ecstatic dry humping his LULU charts again and gushing over the IRE spectacular near $1 rise.

Thu, 12/09/2010 - 14:10 | Link to Comment Let them all fail
Let them all fail's picture

TRF got annihiliated yesterday!! (~-5%)

Thu, 12/09/2010 - 14:55 | Link to Comment Let them all fail
Let them all fail's picture

.

Thu, 12/09/2010 - 12:26 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

The damage is already done.

As far as the Ponziis concerned damn the risk, full speed ahead with the printing presses. At this point, as planned nearly everyone is stranded in the same lifeboat. The Ponzi message is clear. Either jump in the water 100 miles from shore and die from exposure or hope and pray that Bernanke can make a bigger boat out of fiat currency and save the world only to play the same game all over again.

In a one game town, there is no way to win. Stop playing the game. Withdraw your consent.

Thu, 12/09/2010 - 12:34 | Link to Comment spartan117
spartan117's picture

I'm not buying anything except ammo these days. 

Thu, 12/09/2010 - 12:43 | Link to Comment Whizbang
Whizbang's picture

Check, finally someone I agree with. Cheaperthandirt.com has been having some great specials finally. I just picked up a thousand rounds for about 10$ a box

Thu, 12/09/2010 - 13:04 | Link to Comment buzzsaw99
buzzsaw99's picture

Sigh. +1

Thu, 12/09/2010 - 13:55 | Link to Comment Secunda
Secunda's picture

That is funny. Don't forget the re-loading equipment!

Thu, 12/09/2010 - 15:31 | Link to Comment SheepDog-One
SheepDog-One's picture

Damn straight, spartan.

Thu, 12/09/2010 - 12:42 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

Stop worrying.  PIMPCO et al are TGTF (Too Governmental To Fail).  They´ll just print some more money!

Yes to buying ammo.  Gold and silver too.

...

CogDis, If/when the first TSA Agent gets really smacked, what do you think might happen?  Help wake us up?

My little pitty-pat (I am in Peru now) did not touch the junk, but someone will get abused at some point and will cold-clock a Fed TSA Agent.  OK, he will get 5 years, but will that kick off any resistance?

Thu, 12/09/2010 - 15:18 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Considering what has not kicked off resistance, I suspect the only thing that will rally the natives is a failure in the just-in-time deliveries to the grocery stores or a nationwide EMP pulse that knocks out the TV/Internet/radio/DirecTV etc entertainment.

But of course if the EMP happens, we won't know that the revolt has started will we?

Thu, 12/09/2010 - 18:28 | Link to Comment Bob
Bob's picture

There's a new CyberWar going on, CD.  Talk to me. 

Thu, 12/09/2010 - 12:33 | Link to Comment Quinvarius
Quinvarius's picture

Pimpco is TBTF!  Ahhhhhh!  Stop slapping me!  I said what you wanted!  Okay.  I will go back on the street and earn now.

Thu, 12/09/2010 - 12:45 | Link to Comment willien1derland
willien1derland's picture

ROLF! +100 - So who is da Pimp Daddy? El-Erian or Bill Gross? Thank you for the laugh!

Thu, 12/09/2010 - 12:52 | Link to Comment AccreditedEYE
AccreditedEYE's picture

Sorry to hijak, but wouldn't it be simply poetic to see AAPL sell off hard into the Christmas holiday? LOL If risk comes ripping off, this pig will take it in the face squarely.

Thu, 12/09/2010 - 13:01 | Link to Comment Tense INDIAN
Thu, 12/09/2010 - 13:31 | Link to Comment hangemhigh
hangemhigh's picture

it might be worth remembering who we are dealing with here.  this is the evil empire at work.

one of the things that has systematically driven this market higher is the short squeeze.

for the fed, all that matters is the bond market. equities are actually an afterthought.

the road to riches since September has been long silver and short treasuries.

if that trade were reversed, not only would the benster be happy, but so would the buttonmen at the fed's proxy bank where everyone wears silver shorts................

Thu, 12/09/2010 - 13:22 | Link to Comment thepigman
thepigman's picture

Gross will secretly buy up the entire long end

of the curve just before the bernank

caps rates at 3.5% or so.

Thu, 12/09/2010 - 13:37 | Link to Comment revenue_anticip...
revenue_anticipation_believer's picture

Categorized as: "Fools on the Hill" "PIMCO" "we are 100% sure" 

What The Rout In MBS Means For Pimco And Broader MBS Investor Alternatives, As The Market Wakes Up To Risk

ZH said:

"" What we are absolutely sure of, is that the plunge in MBS prices in the recent week has left the fund gasping for air. Recall that the TRF has increased its MBS holdings by $50 billion in the prior two months ""

...of course, after all, its ONLY 'OTHER PEOPLES MONEY'....but....but....i 'believed...'  SUCKERS...you gave THEM the money, YOUR money....ha ha ha ha ha aha asdasdfnmz,vcnsa;dflijuwas LOL lol..cough.. i THOUGHT that PIMCO was on the 'inside'....looks like THEY went '"ALL-IN'" without having a 'sure thing analysis/inside ("expert systems") knowledge!!!!!

PIMCO! can't be, no way - must be some very very clever trick THEY are doing, a 'tactical thing'  right? no?  1929 jumping out the windows, 100% sure guys...2010 Xmas...

 

 

 

Thu, 12/09/2010 - 13:32 | Link to Comment DisparityFlux
DisparityFlux's picture

Hello Tim, yea it's Bill.

Say how's the work coming on the new 40-year Treasury?

Good?  Ok, anyway you can get Ben to back off talk on QE3?

No?  Well keep PIMCO in mind when you're ready to start selling the 40-year, we need to position ourselves for more curve flattening on the 10s30s.

 

 

Thu, 12/09/2010 - 13:32 | Link to Comment carbon based unit
carbon based unit's picture

 

dear mr. gross,

 

don't ever out us again.  we give you all that great insider info weeks before its released and how do you thank us?  lesson learned?  good.

 

happy holidays,

the bernank

 

Thu, 12/09/2010 - 13:54 | Link to Comment DisparityFlux
DisparityFlux's picture

Good one.  No honor among thieves.

Thu, 12/09/2010 - 13:55 | Link to Comment thepigman
thepigman's picture

+100

Thu, 12/09/2010 - 14:09 | Link to Comment DonutBoy
DonutBoy's picture

In order for pimco to lose mortgage rates have to stay elevated.  If mortgage rates stay elevated what's left of the housing market takes the next leg down.  That'll do serious damage to the banks and put more homes underwater, more strategic foreclosures.

I don't think the Fed is ready for any of that.  It would be a complete turnaround of everything they've done since the Lehmanmn collapse.  Save all the big players, reflate the housing bubble.  I think what's most likely here is that the Fed re-enters the MBS market as a buyer, keeps buying long treasuries to hold mortgage rates down, and pimco comes out ok.

 

Thu, 12/09/2010 - 15:18 | Link to Comment Inflate-It-Out-...
Inflate-It-Out-Bitchez's picture

I agree.  There's no way that rates will stay high for a prolonged enough period to really damage them because the Fed wont let it happen.  They levered up for a reason and I think we all know that Ben wouldn't let anything happen to one of his BFF's...

 

 

Thu, 12/09/2010 - 18:08 | Link to Comment Bob
Bob's picture

Shades of 2008.  Finance is becoming truly interesting again. 

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