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This Is What Happened The Last Time Pimco Dumped Its US Treasuries
A little over four years ago, on March 2 of 2011, then-Pimco's Bill Gross asked a simple question: "Who will buy Treasuries when the Fed doesn’t?"... to which we added that this is "the reason why the Fed is now locked in a QEasing corner from which there is no exit." Four years later, with ZIRP and NIRP covering the globe, and with both the ECB and BOJ having joined the monetization scramble, the Fed's corner remains.
Incidentally Gross replied to his own rhetorical question: "Bond yields and stock prices are resting on an artificial foundation of QE II credit that may or may not lead to a successful private market handoff and stability in currency and financial markets. 15% gratuities may lie ahead, but more than likely there is a negative two-bit or even eight-bit tip lying on the investment table. Like I did 45 years ago, PIMCO’s not sticking around to see the waitress’s reaction."
For those who may have forgotten the historical context, March was close to the end of the Fed's QE2, which had started in August 2010 when the Fed announced it would buy $600 billion in Treasurys through the end of the second quarter of 2011.
A few days later, Gross put (or rather removed) his money where his mouth is, and as Zero Hedge first reported, PIMCO announced that it had dumped all of its total Treasury holdings, bringing the total from $29 billion to zero in the month of February.
The reason we bring all of this up is because history has just repeated itself, and while Pimco's Total Return Fund (now a shadow of its former self with just $107 billion in assets down from $236 billion in March of 2011) did not sell all of its Treasury holdings, it just announced it had dumped a majority, some two-thirds, of its "government and related-debt", from 23.4% in April to just 8.5% in May, which for a fund this size selling into the illiquid bond market was a huge move.
The reason for the sale? Just like in 2011 when Gross was worried about the end of QE2, expecting a surge in yields, so now Pimco is concerned that the "imminent" Fed rate hike will push bond yields much higher, and has been selling ahead of the move.
Which intuitively makes sense: it is a logical expectation. But... let's look at what happened the last time PIMCO dumped all of its Treasury holdings: presenting a chart of the 10Y yield from February 2011, when yields had peaked on the PIMCO selling through the end of the year.
Fast forward 6 months after PIMCO's Treasury sale and yields crashed to the lowest on record (as of that time), sliding as low as 1.75%.
The reason: not only the end of QE2 but the US AAA-rating downgrade by S&P in August of 2011 led to a prompt bear market in stocks, and with skittish investors unsure where to put their money, they dumped it all into Treasurys, sending yields crashing.
What happened next? The Fed launched Operation Twist and stocks regained their "lower left to upper right" footing, and yields rose.
So will it be deja vu all over again? Is PIMCO dumping bonds at just the wrong time, and will the result from the Fed rate hike be a carbon copy of 2011 (when as a further reminder, the ECB under Jean-Claude Trichet also hiked rates in the summer of 2011 only to unleash a disastrous episode for the European economy culminating in its own QE a few months ago), and lead to a plunge in stocks matched only by the plunge in yields.
And, most importantly, while 2011 saw Operation Twist to bail out the stock market, will the end of 2015 or the start of 2016 see the fully "cornered" Fed with no choice but to launch QE4?
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Insider trading? Never, LOL>
No worries...we always have China to back us up.
Until they sieze the exact moment when they don't.
Bill Gross has been harping on about a bond bubble for almost a decade now, and interest rates are still at all time lows!! He still doesn't get that US treasuries simply can't go down. If the US economy gets better, our bonds become more attractive, and rates will fall further. If we or the world experience economic an setback, then investors will pile into US treasuries for their proven safe-haven status. There simply is no situation under which bonds can go down. They're a guaranteed profit.
You're slipping, MDB. That was not satire. That was truth.
Gundlach says 1.5% wage inflation over all future time frames is unpossible. Sees a 50/50 chance for a hike in 2015.
http://www.reuters.com/article/2015/06/09/us-investing-gundlach-outlook-idUSKBN0OP2F320150609
With a weak dollar it doesn't matter if yields stay high or not, they will be paid in shitty fiat currency that has no value.
Exactly those interest rates can't rise too high or else it will cause the US Federal Government to default. The magic number is whatever will cause the Federal Government to miss an interest payment.
If someone wants to run the numbers by all means. Doesn't matter if they raid all pensions, 401k's, etc. You eventually run out of money to steal and no taxation can make up that shortfall which in turn forces budgets (they have to budget around the interest rate payments each quarter) and interest rates on treasuries to correlate. Everyone is scared of defaults or else they would just cut Greece loose and get it over with. If you think the lies and numbers are bad now wait until there is nothing left nailed down to steal to keep from defaulting in the US.
"Exactly those interest rates can't rise too high or else it will cause the US Federal Government to default. "
Pssssst, got a secret for ya. The Criminal Fraud UNITED STATES, CORP. INC. has already defaulted via the Banking Emergency Act of 1933 plus, & if my memory serves me correct three other times prior to 1933.
Making you a Corporate Asset to the Criminal Fraud Entity aka THE UNITED STATES, CORP. INC.
Just how are they right when they dump and the bonds rise to yield the lower yield?
Take a look at the price move on the TLT ticker for the last 90 days.
Looks as if the holders took a 15% or so markdown in value.
Seems that the guaranteed profit in bonds is about the same as for those who bought gold at $1,800.
except when the petrodollar is no more and people put their money in the brics nations instead
Careful with "guaranteed profit (s)", when it comes to investing..
China knows how awesome we are. I'm sure they'll always be there for us.
Once the mainstream fools realize it is QEternity then PM's will do well, at least relative to the dollar. The FED will never stop buying bonds.
** ALERT **
Watch out ZeroHedge commenters. The DOJ could be coming for you.
http://motherboard.vice.com/read/the-government-wants-names-of-online-co...
Wait until China decides to roll its trillions in US Treasuries to BRICS Treasuries.
How much longer?
Seems they are letting them mature and then buying up US assets.
Oh come on....China luvs us.....right?
They are like the IRS - they love your money and hate capitalism, never mind that both only survive because of capitalism.
Considering they had to go back to using typewriters whilst they debugged their NSA
riddled computer systems, they are actually moving pretty quickly.
As to the when, when they can no longer get delivery on the gold they are buying.
It's not the Treasuries that's been sold (like IPO stock), it's who will buy the new stuff/finance us?
unlikely. "ChiMerica" the US is the single largest consumer market on the planet and the only society with elastic consumer credit to buy all the iChicrap they need to produce and export. the BRICs, less C, are a shadow of the size of the US.
china needs only to throw maybe 20B into other govts markets to create a BRIC forex mechanism. while the ideas are there i dont think China has the depth of expertise to manage it.
China does not want to put all its eggs in one basket.
If they dump US T's and invest in BRIC equivalent their exposure is lopsided and to date they have proven to be too smart for that move.
0.25% rate hike for appearances > market crash > QE4
Operation Jenga?
Can someone tell all the folks what will happen to they MyRa?
If you like your MyRa, you can keep your MyRa.
It might even be the law someday.
More like "If we like your money, we will keep your money." It's but a quick CONgressional vote away!
-US government
It will become theirRA...as in the govt's moolah.
Who will buy US debt? or Who will finance us forever? or Who has enough money to finance us forever?
When they sell all those Treasuries they have to do something with the proceeds in greenbacks. They will buy exports from the US resulting in an export boom in anything and everything of tangible value (no iJunks). American companies will take all the orders they can handle. The American export boom will finance the US for a while as everyone in the world spends their savings in greenbacks and US government takes its cut.
This is the road to hyperinflation.
Can we afford to cash them all out?
Yields always drop after the cessation of QE due to frontrunning in anticipation of the next QE round. (Q€ is demonstrating this perfectly, yields having fallen in anticipation of it, now rising while it's taking place). I'm not really sure if the 2011 debt downgrade had all that much to do with it.
Isn't this time different? (Further QE not possible politically?)
"Further QE not possible politically?"
Politically?
What percentage of the population knows what QE is?
Maybe 1%?
They are fu.king clueless.
They'll only find out when they loose all their dollar denominated assets.
The only thing that I agree with that ass hole Bill Maher: the U.S. Is exceptional, that is, exceptionally stupid!
Generally, I would agree, but June 2015 is different. From a Tradder friend of mine >
if Greece exits the EMU, which we do not think will happen even though it would be best for the Eurozone, the Euro should likely rise (maybe there is a knee jerk negative reaction in the Euro) significantly, hurt the Dollar, lift Oil and sink Treasuries. Expect 3.4% in the 10yr under this scenario.
If Greece remains, then Treasuries will rally as the reverse of the above might occur.
NoVa
Fast forward six months? What happened during those six months? They weren't static. Conecting dots and leaving six months out.......
Janet LibDem is not going to raise rates with 2016 coming.
Trade accordingly
But what do I know? I thought the bond markets would sell bernanke everything Ben bid for in '09 and then just collapse.
Old yeller doesnt need to do anything. The market has more than front ran a 0.25%.....
I dare Jack Lew to come on TV with a napkin in his hand asking for 900 billion
Hank the Crank is teaching him the schtick now.
They say lucifer has deep pockets
Bond market illiquidity is worrying a lot of wall street pros right now.
If the UST market seizes up in this bastardized fraudulent FED clusterfuck we endure, hum vees will be rolling.
Who will buy Treasuries when the Fed doesn't?
The same people who dumped Treasuries to buy Equities when QE ( 1,2,3...) was announced. They will pay for the Treasuries with money from the Equities they sell (as per the end of QE ( 1,2,3...).
The absolute worst thing for Treasuries is the start of another round of QE.
The reason the bond market sells off before / during the "first" Fed hike is because investors start pricing in a series of rate hikes. Bonds always get crushed around the time of the "first" hike.
However bonds do very well around the time of the "last" hike, when the market looks around the macro landscape and figures out that the Fed has "done enough".
So take a look around at the US economy. Imagine you had just come out of a coma and were not allowed to look at rates, only GDP, Employment Particiopation, %yoy Wages, % yoy Retail Sales, %yoy CPI. Then someone asked you whether we were at the start of a Fed rate hike cycle, about to see the "first" hike, OR, are we at the end of a Fed rate hike cycle, about to see the "last" hike.
If the Fed does hike it will be "One & Done" and any bond sell-off is a chance to buy cheap.
However if the Fed hikes and there is a severe Equity correction beware Fed-speak that hints of an emergency round of QE (aka Bond Killer).
Unlike former FED officials,Janet will let the stock market do its' own thing.She will normalize interest rates and it will cleanse deeply around the globe.Everyone has had plenty of time and warning of the process.And I don't believe like most that QE4 will be around the corner for emergencies.When she turns the page,get ready,because it will be very dramatic.Funds around the globe will rush into the U.S. in a massive chase for yield and safe haven investment.It is part of the strategy to recreate new levels of inflation.
i agree, first of all she is changing bosses, and the best thing to do for the new potus is go policy neutral. she was left a pretty good hand to play, after QE there is plenty of liquidity, and they can recycle it with REPO. if the strong dollar policy gets ahead of itself that will hurt exports and jobs, but US markets will get a boost.
LOL
all the rational analysis and logic I see expressed in the comments.
sure, rational and logical in a fairly normal world.. except most seem to overlook the biggest variable of the equation: intent
no free passes should be given regarding intent. history is quite clear with the fed
expand expand expand -> contract
period
P < P + I
barely had a cup of coffee and the Dow is up 140.
Thanks, Pimco.
You would think with yields "exploding" higher equities would be getting hammered so certainly the headlines make no sense.
Obviously there is a WEE bit o froth in equities.
What about the general move higher in the dollar over the past year?
What about oil?
Certainly still no recovery as Hovnanian gets annihilated.
Some of these long everything/short treasuries folks need to have their heads examined.
I told you all a couple of months ago that the financial astrologer Mahendra sharma said this would happen and the bonds will continue to drop all year .
Damn it Jim!
Ms Creature just told me that it looks like renegade Zero Hedge has become the new Wall Street Journal.
After recovering from my aghastness I have to admit it appears she just might be right.
I hate it when the weemon upstage me in the profound ‘ big picture’ financial insight department.
~ DC
Prepsite.org: You don’t have to be a professional prepper http://www.prepsite.org/2015/06/you-dont-have-to-be-professional-prepper...
It's called "front-running the front-runners".
And it's why Treasury yields will actually fall once the Fed starts to raise rates.
This could explain why treasuries have struggled since April- Pimco has been a net seller. Looking at that profile (the short in the 1-3 year maturities), they are going to be hurting if the Fed doesn't raise rates this year.
Here are some more signs of a coming recession.
http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record...
http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/
http://michaelekelley.com/2015/02/24/would-you-pay-39-more-than-asked/
Here is the starting point.
http://michaelekelley.com/2015/04/28/next-recession-will-start-with-this-country/
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
Good luck!