Pimco Doubles Down On All In Bet Fed Will Monetize MBS

When back in December we observed that Pimco's Total Return Fund (which contrary to rumors actually closed the year at $244 billion, or $4 billion more than in the beginning) had a $60 billion margin "cash" position, the proceeds of which were used to purchase a near record $103 billion in Mortgage Backed Securities we thought this is about as far as Bill Gross would go betting the ranch on QE3, and specifically that kind of QE3 that assumes at least a big portion is used to buys MBS (the same instrument that SocGen believes, along with gold, will benefit the most from an imminent QE3 announcement). It turns out we were wrong, and in December the fund doubled down on its QE3 all in bet, by "borrowing" even more cash, or a record $78 billion, using the proceeds to buy even more MBS, as well as Treasurys, which hit a combined 31% of the TRF's holdings. In other words, between MBS and USTs, Pimco holds a whopping 79% of total, mostly in very long duration exposure. In fact, this combination of long duration and pre-QE exposure has not been seen at PIMCO since late 2008, early 2009, meaning that as many banks have been suggesting, Gross is convinced that the Fed will announce if not outright QE3 this January, then at least intimate it is coming.

Yet while Gross timed the advent of QE2 perfectly as well, when he bought up USTs in the summer of 2010 ahead of the August announcement of the second easing, he did mistime the latest build up in MBS in late 2010, which did not benefit from a transition of QE2 into a MBS-focused program. Needless to say, PIMCO was net short treasurys starting in March 2011, just as the security was about to become one of the best performing asset classes paradoxically ahead of the US downgrade. Yet something tells us this time Gross is correct. The only question is whether, as SocGen believes, the QE3 hint will come at the January 25 FOMC meeting or the subsequent one. And since NFP will have to be a rather big disappointment ahead of a major re-monetization episode, it just may be that the formal announcement will be delayed by a few weeks.


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