Duration In Pimco's Total Return Fund Soars To Near Record, Highest Since 2007 In Anticipation Of QE3

Bill Gross came, saw, and i) stopped shorting govvies, and ii) doubled down on QE3, after, as he himself said, he did not anticipate how bad the US economy would get. As the just released latest monthly Total Return Fund data indicates, PIMCO now has a substantial net long position in Government Related securities, at $51.5 billion (net of swaps), a more than 100% increase from the $22.1 billion in July (and a far cry from the $9.6 billion short in April). As a reminder, Gross skepticism was predicated by the concern of who would buy bonds in an inflationary environment coupled with the end of QE2. Well, since then the bottom fell out of the market, and the Fed is about to re-enter the securities market to prevent the latest re-depression with Operation Twist if not much more. So while it no longer makes sense to be short bonds (as Gross has figured out the hard way), what makes sense is to be very, very long duration, since this is what the Fed will be buying in Operation Twist/Torque. Enter Exhibit A - the chart of maturity/distribution of PIMCO holdings, of which most notable is the explosion in average holding duration, which from 4.56 in July, has soared to 6.27 in August, the highest since 6.23 in October, and possibly the highest on record (that said our records only go back to 2007). As part of this expansion, Gross has seen his Mortgage Securities soar to $78.5 billion, the highest since February, when Gross was actively reducing his MBS holding profile, and now is doing the opposite, and is accumulating Agency paper hand over fist in an attempt to extend duration. Bottom line: Pimco is now balls to the wall in the QE3 camp, first to be manifested by Operation Twist, and then, likely by outright Large Scale Asset Purchases. Look for numerous other copycat investors to expand the duration of their fixed income holdings from 4-5 to over 6.

Total PIMCO holdings:

Pimco Maturity and Duration distribution:


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