A little over four years ago, on March 2 of 2011 [10], 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, [11] bringing the total from $29 billion to zero in the month of February.
[12]
[13]
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 [14]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.
[15]
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.
[16]
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?
