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

Tyler Durden's picture

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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Seasmoke's picture

looks like a sure thing

Chris Jusset's picture

QE3 is a sure thing; and bailing out the banksters is a sure thing; ergo, betting that the Fed will buy toxic MBS is a sure thing.  It's a virtual certainty.

Mr Lennon Hendrix's picture

Obama's ploy today solidifies the scheme to brush EVERYTHING under the rug, and the Fed is the rug.

Now the Fed begins to buy MBS from the banks at a time when they still have (perceived) value, because they won't when 20 million forclosures hit the market.

Chris Jusset's picture

Lennon Hendrix said:

The Fed is the rug.

Actually, the Fed is both the rug and the vacuum cleaner.  The only thing missing is the dirt ... oh wait ...

Central Bankster's picture

Just imagine the day when the Fed fails to monetize and all these leveraged bond funds blow up their "safe money" investors.

Captain Kink's picture

Until then buy DMO...still not too late.

Kiwi Pete's picture

Looks like the banks found their bagholder Mr Goss. No need for monetizing now is there?

rosiescenario's picture

Yes, and those 20 million foreclosures will put more borderline houses underwater thus generating more of the same. Deflation for the housing and real estate markets and inflation for the pm's, food, and fuel.


Also hitting this year will be many commercial real estate problems as loans come due and the appraised values will be far lower forcing the owners to either pony up more capital or walk.

MachoMan's picture

and...  property tax valuations...  and then local governments will be forced to cut all of the fire and police personnel before any useless eaters in the ranks...  and threaten to kill puppy dogs at the pound...  etc.

CRE has been so fucking dead for so long I can't believe there is anything left to roll over...  nothing but turds.  It's no different than business credit...  If I can't borrow from a bank at 5% and make any profit with my business, then I don't go into business...  likewise, if I have to pay $X in rent every month and can't make any money with my business, then I don't go into business or I close shop...  no demand for loans, no demand for CRE from anyone with the wherewithal to repay or otherwise live up to the bargain.

HedgeAccordingly's picture

5 10s 30's really took it on the nose today.. seinding ES into low.. though AH thye are bouncing a bit 

ES off highs just like yesterday http://hedge.ly/zBI375

vast-dom's picture

nothing like borrowing against the profits you will make on the insider info from the very source of the insider deal -- talk about some perverted full circlular shit!

Caviar Emptor's picture

One more step would be required: a promisory cut of the profits to the source of both the insider info and the loan. Now that's what I call a beautiful public/private partnership !


 As they walk off across the wet runway into the misty night:  "Benny, I think this is the beginning of a beautiful friendship!" 

kill switch's picture

Not observed you in the past,,,But, vast-dom you are someone that gets it...!!! Welcome aboard!!

vast-dom's picture

thx kill....i've been defiling these here 0H threads for nearly a year now, and what a godamn amazing year it's been! :)

Mike2756's picture

If he's right, could be another Corzine.

kito's picture

only the promise of qe is a sure thing...lay off the hopium, there is no qe3 anywhere in the near future.........

fonzannoon's picture

Kito if you still believe that what happens to rates on the long end of the curve once they are done buying every single 30yr via twist?

kito's picture

ben can purchase without expanding their balance sheet. there are enough scared gazelles running from europe into timmys corner looking to purchase uncle sams debt...........keep clicking your heels dorothy, it wont get you to kansas........

Caviar Emptor's picture

Ben still has one trick up his sleeve to use to push thru QE3: the BTU value of printed dollars (12.44 BTU). Dollars can substitute for oil in many cases if they are printed in sufficient quantities and boilers are retro-fitted. 

Tijuana Donkey Show's picture

Hate to quote the click whore BI, but Europe is WWWWWWWWWAAAAAAYYYY ahead of us


fonzannoon's picture

You say he can purchase without expanding...how? By selling short dated paper?

kito's picture

Not hard to unload u.s. paper in secondary market. Plenty of crony banks to grab it. No qe3 for you!!!

fonzannoon's picture

Kito they don't need to call it QE and they don't need to show it on their balance sheet. I believe you are buying metals and you know this.

kito's picture

fonz have you been snooping around my faux dirty laundry basket with the secret pm compartment???????

Bindar Dundat's picture

will it be good for gold??

fonzannoon's picture

Kito deep down you are wearing a tin hat and stocking bottled water like the rest of us.

J 457's picture

Nothing is for certain.  With the DOW approaching 13,000 how will FED gather the political support to buy more MBS?  I would guess we would need to see some bad data (unemployment and housing) in the next month to justify more QE.  Tough to gloat about a great recovery with ZIRP thru 2014.  It doesn't align.  If you like silver, now probably the time to start or add to your position, assuming QE does happen.

Buck Johnson's picture

Hey knows that QE3 is on it's way big time. 

Kiwi Pete's picture

Just like Corzine betting the farm on PIIGS debt. What could go wrong??

Id fight Gandhi's picture

Rule I learned the hard way years ago. When something is a sure thing, it ain't.

Falkor's picture

Gross is strecthing this a little too much. As things unravel, Bill Gross will become a stuff of legends. Its just that whterher he will the smart guy or the fool.

AndrewJackson's picture

So if pimco is betting the farm on this one, can we expect a 1 trillion plus number of QE? 

Mr Lennon Hendrix's picture

Tyler has outlined how and why the Fed's book needs to match the ECB's, and the ECB said today they would up their's to $7 trillion, essentially doubling it, which means the Fed has to follow suit and double down.

It may not all be put on QE X, but the Fed will, through POMO/OT2/etc double their balance sheet.

Thomas's picture

Now they don't need to monetize.

Mr Lennon Hendrix's picture


Now that Gross bought all the MBS, the Fed doesn't need to.

Rainman's picture

Kill dollar, dollar kill, kill dollar, dollar kill. Dollar down, down dollar, dollar down. Equities up, up equities, equities up.


wandstrasse's picture

Btw, the German word 'groß' means big/large.

fonzannoon's picture

Are these the same mortgage backed securities that should lose value as this refinancing program takes shape?

Captain Kink's picture

Re-fi pays off the previous mortgage in full.  These guys own the mortgages at distressed prices, 50-60 cents on the dollar.  It's the mortgage REITs (like NLY) that take a hit, as they hold many originally purchased at premium

dfh85's picture

Forgive my ignorance; what financial product(s) is he using to facilitate his Fed MBS bet?

Mr Lennon Hendrix's picture

Cash; some he had and some he got when he liquidated his euro bond exposure.

Rainman's picture

Managed account cash...the client piggy bank.

dfh85's picture

I understand he's using client money, but I mean; is he going out there and buying MBS's himself in the hope that the Fed steps in @ a later days and also buys MBS's in the form of QE3? Or is there a more complex strategy?

Lost Wages's picture

Makes me want to switch my wife's 401K to the PIMCO Total Return Fund or that Spartan Bond Index fund which is also filled with MBS garbage. Should I go for it? I won't hold you liable for my final decision as I will do my own research. ;)

blu's picture

All the signs right now point to a huge bailout of MBS. More US$ fiat is about to pour into that sink hole than ever went in a single direction at any time in the history of the earth.

This is going to be way beyond epic. Who the hell knows how it will turn out. But most people in this business seem to say the same thing; follow the money.

spinone's picture

They are just filling a bottomless pit.  Good luck.

itstippy's picture

It's a big part of the Fed's exit strategy.

nmewn's picture

"Should I go for it? I won't hold you liable for my final decision as I will do my own research."

I don't think it matters at this point, but from a purely digitized fiat & technical standpoint I'd wait on PTTRX.

Speaking of junk, I've had the good fortune with one in my 401k (NEHYX) that is junk. I don't hold anything long, well, anyways...lol. My strategy is to watch for one to take a hit (with fundamental merit or not), stabilize and start going back up, be mindful of the deadcat bounce.

I've found this useful lately...


at the bottom of the chart you will see Annotate (Flash). This brings a screen where you can throw up a fibonacci scale (across the top of the pop up screen) on the most recent crash victim you have the ability to choose from within your wifes 401k.

Be mindful always, you are playing in their casino, with her money ;-)

Good luck.

I should be working's picture

You realize trying to forecast returns on PTTRX by one chart is beyond stupid.  Their portfolio changed quite dramatically over the course of the time frame you are looking at.  

Going into the summer PTTRX was in riskier bonds (reaching for yield) and no treasuries.  That's why they went down over the summer.  The market got all hot and bothered in its flight to quality.  

Now Gross is taking duration risk and MBS.  The question to ask if buying PTTRX is: do you believe interest rates will remain low (um is that a question)? Do you think more QE is in store?  Do you not want any sovreign exposure?

The reason the fund has been kicking ass this year is the feds zero interest for evva stance. I'm sure we'll see more QE sooner or later the fed doesn't know how to leave well enough alone.