PIMCO, that tried and true client of Fed "expert network" Larry Meyer who just loves 'hinting' at what the Fed will be doing in the next 3-6 months in exchange for a modest retainer, has just released the December composition of its flagship Total Return Fund. Despite declining for a second month in a row, from $250 billion to $240.7 billion, the world's largest bond fund has once again increased its MBS holdings, this time from 43% to 45%. Keep in mind this was at 18% in July, and in the meantime Bill Gross has gone from $5 billion in net cash to $17 billion on margin. It is obvious that Gross, who already has a major position in municipal debt, and will thus benefit from the imminent state and muni bail outs, also believes that once the Fed is content with having sacrificed 100 bps in the rates to generate 10% in the S&P, will soon be forced back into the mortgage market, and will be buying MBS once again. Based on Gross' ongoing accumulation of MBS, we are now fairly confident that the "expansion" to QE2 (really, QE3 but who keeps count) to be announced sometime in May, will contain Treasurys, Municipal bonds and Mortgage Backed Securities among the asset permitted for purchasing. Unlike the BOJ, we don't think the Fed will announce ETF purchases yet. That will be reserved for QE4, to be announced some time in early 2012.
Total TRF holdings:
And duration distribution: the fund's holdings in the 3-5 Year space have surged to a whopping 50% of total, a total last seen in November 2008 just as QE1 was being disclosed.