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3bps To Go Until QE3 Makes Treasuries America's Second Safest Security

Tyler Durden's picture


We discussed the unintended consequence of QEternity previously as we noted the massive front-running of the Fed's MBS buying program that was occurring as 30Y current coupon mortgage bond yields were tumbling. While the last week or so has seen Treasury yields reverse their rising trend, the trend of front-running the Fed has not abated. In what, quite frankly, stunned us more than Sofia Vergara's wardrobe malfunction this weekend, we note that today the spread between the 30Y FNMA CurCpn mortgage bond (at 1.66%) and 10Y US Treasuries has smashed to incredible all-time lows of around 3bps. The day before QEternity, this spread was 60bps - having been over 100bps at the start of June 2012. The previous low from July 2010 of 54bps has been obliterated as Bernanke has managed to remove one more market from the lexicon of risk (and in the meantime, PIMCO's Bill Gross has earned back his 'bond guru' title by making a killing). Can we see Mortgage yields trade inside of Treasury yields?

Mortgage spread...


Now the banks (and asset managers) have all this MBS debt stockpiled on their balance sheets - they will be more than happy to sell it back to the Fed $40bn at a time for the foreseeable time...

And speaking of reporting a blockbuster year, guess which mega fixed income manager, who had a lackluster 2011, is about to report a monster 2012. That's right, the same one we reported has been stockpiling MBS starting in February of this year:

From February 9:

Pimco Borrows A Record $88 Billion To Bet On Fed's Upcoming MBS Monetization

Regular readers of Zero Hedge know that in recent months tracking the portfolio and thoughts of one Bill Gross via the holdings of his flagship Total Return Fund (which just jumped by $6 billion in the past month and is just shy of its all time record north of $250 billion) has meant one thing and one thing only: betting on the Fed monetizing Mortgage Backed Securities or bust. Well, in January he just took it to a whole new level. The fund has now borrowed a record $88 billion, or -35% of its AUM, in cash (shows how much he thinks of the dollar) and used the proceeds (together with dumping European sovereign bonds from 18% to 11% of AUM) to bet on MBS which now stood at a whopping 50% of the entire portfolio - the highest since July 2009 when QE1 was in full force. However, in absolute dollar terms, due to the growth of the fund's AUM, the actual bet on MBS has never been bigger, and at $125 billion, represents the biggest notional bet ever made by PIMCO. Treasury holdings of just over $100 billion with an effective duration of 6.33 complete the epic bet that the fund has now put on QE3.

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Wed, 09/26/2012 - 14:29 | 2832949 LULZBank
LULZBank's picture

Treasure the Treasuries Bitchezz!!!

Wed, 09/26/2012 - 14:32 | 2832964 CPL
CPL's picture



It's on like Donkey Kong.  Anons are reporting everything is moving now from Russia, China and Iran.  


Good luck guys.

Wed, 09/26/2012 - 14:45 | 2833004 urbanelf
urbanelf's picture

Physical paper, bitchez!

Wed, 09/26/2012 - 15:32 | 2833146 whatsinaname
whatsinaname's picture

BG's fund isnt showing monster gains just yet ? Are more gains to come as he also offloads the MBS to the Fed ?

Wed, 09/26/2012 - 15:45 | 2833216 slaughterer
slaughterer's picture

News Headline Summary Pimco's Gross says Italian and Spanish bond may be good buy


http://ransquawk.com/assets/ransquawk/sprites.png); background-attachment: initial; background-origin: initial; background-clip: initial; background-color: transparent; text-decoration: none; font-weight: bold; color: #cc0000; text-indent: -119988px; overflow-x: hidden; overflow-y: hidden; text-align: left; height: 16px; display: inline-block; float: left; width: 16px; zoom: 1; background-position: -128px -48px; background-repeat: no-repeat no-repeat; padding: 0px; border: 0px !important none !important initial !important;" title="Print this headline (Opens in pop up window)" href="http://ransquawk.com/print/headlines/244949">Print18:09 - Economic commentary - Source: Newswires

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Wed, 09/26/2012 - 14:29 | 2832951 Cash2Riches
Cash2Riches's picture

Wow talk about manipulation.



Wed, 09/26/2012 - 14:32 | 2832952 Abraxas
Abraxas's picture

The safest one being...? Mortgages? Wow!!!

Wed, 09/26/2012 - 14:46 | 2832961 Dr. Engali
Dr. Engali's picture

MBS..... the root of the crisis a tier one asset bitchez!

Wed, 09/26/2012 - 14:48 | 2833009 dwayne elizando
dwayne elizando's picture

But can you use it to post collateral?

Wed, 09/26/2012 - 14:33 | 2832965 Cognitive Dissonance
Cognitive Dissonance's picture

I think it much more likely that the average homeowner will pay back their "loan" than Uncle Sam.

Wed, 09/26/2012 - 14:39 | 2832987 ssp2s
ssp2s's picture

Is that because homeowners have printers?

Wed, 09/26/2012 - 14:58 | 2833047 Cognitive Dissonance
Cognitive Dissonance's picture

It is because they don't.......so they have to do it the old fashioned way........earn it.

Wed, 09/26/2012 - 14:34 | 2832972 jcaz
jcaz's picture

Dumb to trade against Bill- that was a lay down.....

Wed, 09/26/2012 - 14:35 | 2832975 Zola
Zola's picture

Bill Gross ??? Wtf has he created ? He is just riding the Fed. Probably had to pay up a bit more for "access"...

These people are not investors.

Wed, 09/26/2012 - 14:42 | 2832993 What is The Hedge
What is The Hedge's picture

For the record, the only investors are those who either bought the original bond or the IPO, everyone else is a trader.

Wed, 09/26/2012 - 14:59 | 2833048 Urban Redneck
Urban Redneck's picture

That is a gross oversimplification and wrong to boot.

On the debt side - there's anyone who buys and holds the bond to maturity

On the equity side - there are the are LBO shops and the whole M&A INDUSTRY

And just for shits and giggles...

Even though most people here propably have almost as low an opinion of Warren Buttfuck as I do, they probably would admit that his holdings in Coca Cola (and a number of other companies) are investments, as opposed to trades, even though they would fail all the litmus tests mentioned...


Wed, 09/26/2012 - 14:37 | 2832980 dwayne elizando
dwayne elizando's picture

Can we see Mortgage yields trade inside of Treasury yields?

Yes we can!
Yes we can!
Yes we can!
Yea we can!
I'm buying mortages with my EBT!

Wed, 09/26/2012 - 14:42 | 2832995 helping_friendl...
helping_friendly_book's picture

Glad I fled the safety of having all my 401k in MM and put it back in Total Returns! I'm keeping my finger on the reverse trade if rates , ever, start to go up.

Wed, 09/26/2012 - 14:45 | 2833000 JR
JR's picture

This doesn’t sound like a recovery: headlines on Drudge today:

CEOs now see gloomy third quarter, drop growth expectations | The Washington Times | 09/26/12

Citing uncertainty over the impending “fiscal cliff” and lower demand overseas, an association of CEOs from top companies on Wednesday dropped its growth expectations for the third quarter to the lowest level since the middle of the Great Recession.

The Business Roundtable lowered projections for sales, capital spending and hiring in its latest CEO Economic Outlook Survey to the lowest level since 2009.

The fiscal cliff — an end-of-the-year deadline for a long-term budget deal between Republican and Democratic lawmakers — has businesses putting off hiring and spending decisions, because they don’t know what to expect in the coming months and years, said Jim McNerney, the CEO of Boeing who also heads the Business Roundtable.

“This complete Mexican standoff that we have now is not getting us anywhere,” he told reporters.

Business Roundtable President John Engler called it a “fiscal Everest.”

Read more: CEOs now see gloomy third quarter, drop growth expectations - Washington Times http://www.washingtontimes.com/news/2012/sep/26/ceos-now-see-gloomy-third-quarter-drop-growth-expe/#ixzz27bP4DDu9

55% Of Small-Business Owners Would Not Start Company Today, Blame Obama...
Low-wage work force grows 30% as number of jobs shrinks...
Household Incomes Down 8.2%...

Wed, 09/26/2012 - 14:44 | 2833001 Snakeeyes
Snakeeyes's picture

Even better, FNCL 3.5 MBS duration just went NEGATIVE! Graphs here.


Wed, 09/26/2012 - 14:53 | 2833018 RSBriggs
RSBriggs's picture

So, negative duration?  You walk into the office  and they just hand you the interest on bonds you would have purchased??

Wed, 09/26/2012 - 18:25 | 2833829 socalbeach
socalbeach's picture

Maybe that is displaying the "Modified duration" instead of the "Macaulay duration".


(nevermind, just saw this at above link: "It turns out that when the yield is expressed continuously-compounded, Macaulay duration and modified duration are equal.")

Wed, 09/26/2012 - 14:45 | 2833003 max2205
max2205's picture

money for nothing and profit risk free....

Wed, 09/26/2012 - 14:48 | 2833008 realtick
Wed, 09/26/2012 - 14:48 | 2833011 Oldwood
Oldwood's picture

The beauty of corruption is that while everyone knows it corrupt they will still participate because of how profitable it is. Listening to so many proclaim their investment strategies tells me that what the government is doing is working. You are still in the game! Exactly where they want you. The casinos would never allow their tables to be so rigged that no one could win for fear no one would ever return. They have to have winners and every now and again, big winners to keep the juices going. Keep em coming back to the tables.

Wed, 09/26/2012 - 16:56 | 2833555 honestann
honestann's picture

Yes.  So anyone with brains is...

Convert 100% into real, physical gold, silver, platinum... and real physical productive assets located outside the USSA... and outside the primary sphere of influence of the USSA.

Wed, 09/26/2012 - 14:49 | 2833015 blunderdog
blunderdog's picture

But US treasuries are automatically triple A, aren't they?


Wed, 09/26/2012 - 14:56 | 2833039 Scalaris
Scalaris's picture

I can see Gross letting his "fuck you" mustache grow now.

Wed, 09/26/2012 - 14:57 | 2833042 Snakeeyes
Snakeeyes's picture

Actually, the Fannie CC spread is now at -3bps!!!!!!!!!!!!!!!!!!!!!!!!!!


Wed, 09/26/2012 - 15:09 | 2833045 sitenine
sitenine's picture

This is getting downright stupid. Who the fuck backs the Fed when all these 'AAA ' MBS stink piles evaporate due to nonperformance? That's right friend. You do! Are you ready to be taxed into oblivion? This is what fascism looks like up close. Take a good hard look at our new reality, where moral hazard has become moral imperative. Time is short friends. If you still don't know what to do, I suggest finding out as quickly as possible- at least your reading ZH, so you're half way there.

Wed, 09/26/2012 - 15:24 | 2833124 LawsofPhysics
LawsofPhysics's picture

"Who the fuck backs the Fed" - according to the Federal Reserve Act, that would be the U.S. taxpayer.  Work it off in the FEMA camp bitchez.

Wed, 09/26/2012 - 15:23 | 2833121 LawsofPhysics
LawsofPhysics's picture

So the "first" safest bet would be the banks.  color me "shocked"

Thu, 09/27/2012 - 03:36 | 2834659 devo
devo's picture

Yep. This is what I was getting at in another thread.

Full retard, but that's the world we live in.

Wed, 09/26/2012 - 15:42 | 2833201 Theosebes Goodfellow
Theosebes Goodfellow's picture

~"...stunned us more than Sofia Vergara's wardrobe malfunction this weekend,..."~




[ Special thanks to Wayne's World!]

Wed, 09/26/2012 - 15:54 | 2833264 Gamma735
Gamma735's picture

Bullish on bullets when the house of cards collapses.

Wed, 09/26/2012 - 17:17 | 2833641 Downtoolong
Downtoolong's picture

Can we see Mortgage yields trade inside of Treasury yields?

The least they can do when it happens is play a little Twilight Zone music at the next FOMC meeting for proper effect.

Wed, 09/26/2012 - 18:12 | 2833681 socalbeach
socalbeach's picture


Wed, 09/26/2012 - 18:16 | 2833846 elementary
elementary's picture

This does not prove Bill Gross to be a bond guru. It only substantiates his position as Chief Pimp after he already admitted in 2010 that he gets the inside scoop from the Fed in advance. If you not only have the opposition's playbook, but help make the plays, how is that difficult? Bill Gross is just as morally corrupt as the rest of them.

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