PIMCO

In an interview with Bloomberg's Tom Keene, Richard Clarida of PIMCO has pretty much sealed the fate of Greece: "I don’t think that [7%] would be an attractive enough yield. Greece is sort of like the Titanic. Eighteen things went wrong, and when they go wrong at once it’s problematic." Of course, with this kind of rhetoric the 10 Year will be trading at 8% tomorrow, followed up by Clarida saying not even 9% would be attractive, and so forth. When you have the world's largest bond fund say it is not touching Greece with a ten foot pole essentially no matter what the yield, you get an idea of why Greek 1 Year CDS is trading 600/700. In the meantime, stocks continue to be blissfully unaware of what the surge in the dollar will mean to Obama's export-led US manufacturing utopia. Oh well, at least we can continue to export "advanced" Wall Street services to Greece (and most other European peripheral countries) post default, courtesy of every domestic restructuring firm which is currently brushing up the sovereign reorganization "we are great" pages in its pitchbooks.

Last weekend The Los Angeles Times featured a story about the war room discussions at PIMCO. Now with over $1 trillion under management and bonds teetering, the pressure must be huge to start chasing equities and other risk assets.

More insight from a just released interview with Pimco's Paul McCulley. Nothing that McCulley has not said before but sheds some additional light on PIMCO's specific portfolio exposure currently. Of course, as Goldman has taught us all too well, anyone talking their book who is as big (and smart) as Pimco, could just as easily hld the other side of the trade, and just be looking for willing lemmings, of the variety that stood 24 hours in line for a big and blendable iPod.

The U.S. economy’s recent growth has been underpinned
significantly by government policy, yet this short-term cyclical
support will likely fade in the second half of 2010. As a result,
investors should take advantage of the tighter credit spreads and focus
on de-risking their portfolios in order to prepare for the increasing
long-term secular headwinds stemming from the growing deterioration in
public sector balance sheets in many developed economies.

Mark Kiesel, PIMCO Managing Director

"I cringe when I hear men like Kansas City Fed President Tom Hoenig muse that the Fed will ultimately need to get the Fed funds rate back up to a 3.5-4.5% zone. I deeply respect Mr. Hoenig, both as an economist and as a man, but I just don't see why the Taylor Rule of the Forward Minsky Journey should apply to the Reverse Minsky Journey. Simply put, the 2% real Fed funds rate constant in the Taylor Rule should, in my view, be considered toast. In a world of deleveraging and hoarding cash it makes absolutely no sense to reward holders of cash with an after-tax real rate of return." - Paul McCulley, Pimco.

Pimco's Total Return Fund has released its February holdings, which is now a ridiculous 54% higher than a year earlier, at $214.3 billion. The fund reduced it cash holdings from $19 billion in January to just $4 billion in February, and used the proceeds to buy $10 billion of US Treasuries ($75 billion in total), $5 billion in Mortgages ($36 billion), and also expanded further internationally, buying $3 billion in Non-US Developed country bonds (total of $41 billion). Pimco also surpassed the $10 billion mark in Emerging Market holdings. The firm kept its holdings of High Yield bonds flat at $6.4 billion. While there were no major asset reallocations, Pimco did change its curve exposure materially, eliminating all of its sub-1 year paper, which in January amounted to $17 billion. The firm added the most exposure to the 5-10 year bucket, which increased by $12 billion to $72.9 billion. The greatest amount of holdings is still in the 1-3 year bucket. Holdings of 20 years or over were a moderate $15 billion. Is Pimco gradually shifting to a flattener position?

We have now reached a point when a Senator has to write a well-intentioned letter to the very administration he serves, (whose sworn duty is to preserve the wealth of all of its constituents, not just Goldman Sachs), with a cautionary tale that continued lying to the general population combined with a culture of opacity and persistent fraud, will lead to a disastrous effect to the economy and to the very fabric of American society. Alas, in a society in which those being lied to extract a satisfaction as great, if not greater, from this process, than those doing the actual lying, this is not too surprising. Sticking our collective heads in the sand has traditionally worked miracles for resolving the bulk of this nation's problems. And with the public sector now demonstrating a preferential treatment for the financial space, at the expense of 99% of the remaining population, it has become obvious US citizens can no longer rely on the US government for procuring the truth. Furthermore, with China now a vassal owner of America via its undisputed creditor status, we may soon lose the protection the government is entrusted with affording its citizens in other realms, from enemies certainly domestic (mostly located in south Manhattan), and very possibly foreign. Yet, another voice of caution that has recently emerged, and whose message is critical to all, is that of Pimco's Mohamed El-Erian. The Pimco executive has written another very relevant Op-Ed in the Financial Times, "How to handle the sovereign debt explosion" which does not so much disclose new things, as capture the essence of the groundbreaking transformation that is currently occurring within the entire "developed" world, and more specifically, the denial that the vast majority of "experts" are exhibiting when faced with a previously unseen process of unprecedented significance.

The latest data released by PIMCO's Total Return Fund indicates that the firm's flagship fund added another $8 billion in AUM, which at January 31 stood at $210 billion. This is a $74 billion increase in AUM compared to January 2009. More importantly, the composition of TRF demonstrated that the recent trend away from MBS and Treasuries and into cash and non-USD denominated foreign bonds persists. Gross has now booked $88 billion in profits in MBS since QE started, which brings his MBS holdings to an all time low of $31 billion. All the extra cash has gone into foreign non-US denom bond holdings, which hit a new high of $38 billion, presumably mostly in Bunds, Brazilian and Russian holdings, and, well, cash, which at $19 billion hit the highest level since June 2008.

Pimco's Michael Gomez, who recently shared the floor with Hugh Hendry, Marc Faber and Nassim Taleb, and who was likely the key voice in Pimco's recent decision to accumulate German Bunds, shares insights on the euro, Greece and new investment opportunities. Based on this Bloomberg TV interview, it is likely that PIMCO will soon be accumulating a variety of Polish and Brazilian sovereign bonds, as well as corporate bonds in Brazil, Mexico and Russia, with an emphasis on the first. With tens of billions in dry powder, PIMCO will likely have an increasingly risky EM exposure as it departs from its traditional MBS/UST portfolio.

"Over the next few days, we are likely to get some combination of Greek and European donor announcements aimed at calming markets, reducing volatility and reducing contagion risk. But the impact on markets is unlikely to be sustained as both sides face multi-round, protracted challenges which contain all the elements of complex game dynamics." - Mohamed El-Erian

Congratulations Bill Gross: PIMCO's flagship Total Return Fund closed December at $202 Billion, representing $70 billion in net inflows, more than the combined inflows of the prior three years. December also saw a curious reshuffling of TRS' portfolio: Gross sold a whopping $34 billion in Treasuries, bringing the total to $64.6 billion from $101.7 billion in November. And while the bond manager surprisngly added $10 billion in MBS (now accounting for 17% of holdings) after selling $95 billion in MBS to the Fed in the previous 10 months, for the first time (probably ever) PIMCO's holdings of Treasuries and MBS accounted for less than half of total holdings. As was previously noted, Bill Gross notably increased his non-US Developed country bond holdings by $22 billion to $32.3 billion, which is a direct result of his recent purchases of German Bunds.

Paul McCulley discusses the failed Japanese inflation experiment, and the ongoing 3rd decade of deflation, which has destroyed over 70% of the Nikkei's value. The reason proposed by the Pimco Managing Director for this 30-year ongoing weakness: an inability to fight the "liquidity trap" with sufficiently forceful measures. Yet an implication of Pimco's perspective is that despite posturing for an end to QE in March right here in our very own United States, this will likely not happen, or even if it does, QE will promptly return soon thereafter.

The end of QE will be a big problem in the US. Yet what happens in the UK, where the BOE is openly monetizing, once their free liquidity ends, could be a watershed event. Couple this with the likelihood of a downgrade, and the UK's fiscal and monetary future in 2010 is looking quite shaky. Today PIMCO's Scott Mather told Dow Jones his expectation for a rating downgrade of the island nation: "It's just a question of when on the current trajectory, not if. Based on what we know today about the debt trajectory and about the inability to adjust that, I think it's greater than a 50% likelihood for sure. Call it more like 80%." And according to Mather, rates on gilts will shoot up by 100 bps once the bond-buying program ends. It is amusing that the fiscal health of the developed world now hinges on the amount of ink cartridge accessible by the two main central banks.

"For interest rate exposure, or duration, we are currently cutting back in the U.S. and U.K. because, as mentioned before, supply and demand dynamics are likely to be negatively affected as borrowing rises and central bank buying declines...With corporate bonds, we are becoming a bit more cautious than we have been. In the third and fourth quarters of 2009, we believed the massive narrowing of spreads we saw in the second quarter wouldn’t go much further. We weren’t necessarily selling credit on any scale, but we’d reduced buying....In agency MBS, we are underweight, having reduced our exposure as the Fed’s buying programs have dramatically tightened spreads...we are underweight TIPS versus the benchmark, reflecting our view that risks are currently weighted toward a disinflationary environment." Paul McCulley

You don't really expect to see huge spikes in large ($1 billion plus AUM) bond funds absent some significant fixed income news (or perhaps, internal scandal). So what's going on with the PIMCO High Income Fund (NYSE:PHK) today?

Update: Volatility study added.

Update #2: It appears a Zero Hedge post back in March may solve the mystery of the tactical nuking of PHK. We are beginning to suspect a bit of naughtiness in the form of insider trading.