PIMCO: +$50 Million; Morgan Stanley: -$50 Million

It just has not been Morgan Stanley's year: first the bank's prop desk got decimated by the massive tightening in MBIA CDS (previously discussed here), and then, as noted last week, the firm's rates desk got creamed by a massively wrong bet on 30s - 5s TIPS breakevens (courtesy of another ex-master of the universe who realized the hard way that things are not quite as profitable when you move away from being God's right hand guy). We previously broke down the details of the trade, and the only open question was: qui bonoed? Courtesy of the WSJ we can now close the file on that one. The firm, which as so often happens to be the case, that took Morgan Stanley to the cleaners is the one true rates behemoth, PIMCO, which sooner or later, always gets it pay day. Bottom line: "Pimco made about $50 million from its trade over several months." Perhaps prop trading really should be banned to protect banks, if not from their stupidity, then certainly from their hubris.

Some more details from the WSJ:

The bond powerhouse, a unit of Allianz SE (ALV.XE), scored gains of about $50 million on an inflation-related trade, according to people familiar with the matter. Morgan Stanley, meanwhile, suffered tens of millions of dollars in losses on an opposing trade and related moves, according to another person familiar with the matter.

After joining Morgan Stanley, Mr. Hadden put out word that his firm was determined to become a more-active bond player, according to two investors in contact with Mr. Hadden's team. They placed a trade reflecting a view that investors' expectations of inflation over the next 30 years were too high, while predictions for inflation over the next few years were too low, traders say. They began to "short"--or bet against--30-year TIPS, expecting long-term inflation to be muted, traders said. They also bought "nominal" 30- year Treasury securities, or bonds not protected against inflation.

This two-part trading move ensured their trade would rise and fall solely on changing long-term inflation expectations rather than other factors that drive prices of all bonds, including TIPS.

At first, the Morgan Stanley trade worked. Mr. Hadden made it clear to investors that Morgan Stanley was going to stick with its positions, and even add to them, traders say. When investors asked to buy 30-year TIPS, Morgan Stanley offered to sell investors even more of these bonds, these traders say. Morgan Stanley also recommended clients bet against 30-year TIPS, arguing it was the best move for those wishing to wager against bonds, according to a hedge-fund manager who received the pitch.

"It was a well-telegraphed trade" by Morgan Stanley, says Keith Price, head of U.S. inflation trading at BNP Paribas.

Like other traders, Pimco's team, headed by Mihir Worah, became aware of what Morgan Stanley was up to. As Morgan Stanley continued selling 30-year TIPS, Pimco bought even more of these bonds in the market, the people say. Meanwhile, Pimco's buying enabled Morgan Stanley to add to its own short position, traders say.

The standoff came to a head in the middle of June, as demand for 30- year TIPS grew. Some rivals say they came to a conclusion: Mr. Hadden's team, under pressure as prices of TIPS rose, would start exiting from its trade, probably by buying a big chunk of 30-year TIPS at an auction on June 23. Rivals decided to make strong bids in the auction, traders say. Pimco also decided to bid aggressively, to ensure it could get its hands on these bonds. The auction of $7 billion of 30-year TIPS resulted in a record amount of bids in relation to the auction size; Pimco succeeded in buying several billion dollars of the bonds, according to a person close to the matter.

It is as of now unclear just where the formerly amazing Mr. Hadden will go next if his masters end up being displeased with his performance of ~($50) million in six months.

In the meantime, the recent blow out in the USGGBE30 - USGGBE05 has served as a very appetizing entry point to those who wish to be the next Morgan Stanley, as expected: "What is ironic is that everyone and their grandmother will now slowly bleed MS' team to death as it is forced to unwind the spread, only to immediately put the compression trade back on, at which point the 30Y - 5Y will resume its tightening bias.... "

Well, when all else fails, there's always Jefferies, which will be a bulge bracket boutique, pardon, bank, any... minute.... now.

h/t London Dude