The financial media is making a big fuss over the report that PIMCO is now short US Treasuries. This isn’t all that surprising given the firm’s incessant fear mongering about government default. Of course, that hasn’t stopped them from buying instruments backed by the full faith and credit of the USA (as they’ve been riding the coattails of the real bond guru Jeff Gundlach into MBS), but who needs facts when you can make headlines by giving the appearance that you are sympathetic to the fears of the common man?

But more importantly, PIMCO’s big move is eerily reminiscent of QE1 when Bill Gross predicted surging yields.  Of course, he top ticked the market to the day and yields immediately tanked. In early 2010 Gross said:

Won’t that (the end of QE1) put upward pressure on interest rates?
“I think it will. I mean, the mortgage market would be your first place to look, in terms of something that’s overvalued that would become normalized. Nobody knows what the Fed’s buying is worth — we think about half a percentage point on rates, but we don’t know.”

You sure didn’t know!  Rates topped on the exact day QE1 ended.  And if their timing is as good this time around, the battle ship of bond market firms might be moving out of the way of the torpedo just in time to confront the one coming in the other direction.  In other words, one has to wonder, if Gross was so spectacularly wrong about QE1, why should anyone expect him to be right about QE2?


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • SS

    Gross is a media whore. Ignore him.

  • prescient11

    Exactly, good thoughts TPC. Soros is actually probably right that we could take on some more debt near term to help “stimulate” the recovery, I just wish it would be a huge infrastructure plan rather than entitlement programs.

    It’s the longer term I am very concerned with.

  • Big_Mac

    Looks like Bill G = Coin Flip so he has a 50% of being right!

    My guess = coin flip is that the Fed may be running out of room and may surprise us.

  • Sanford

    You guys are being naive if you think Gross necessarily trades what he says. If you look at the PIMCO balance sheet they were actually long USTs at that point and was adding all the way up to June ’10. He knew what was coming, as QE2 was probably decided on shortly after $TNX broke that new high in April ’10. It would have ran away without further intervention. PIMCO’s been selling ever since and probably made a killing on that little maneuver.


    Now, however, they’re actually literally ‘for-reals’ short government debt, but only a relatively small amount. Another trap to load up some more shorts to nuke ahead of a QE3 leak? Maybe. Or maybe he’s trying to break support here as his announcement comes at critical technical level, or maybe he actually really is bearish on USTs. One thing’s for sure: I’m not about to take his “word” on anything!

    As always, trade the charts ignore the news.

  • hankster

    I am pretty sure they just want to accumulate at better yields by forcing the market down if they can.If anything,the small short position may just be a smokescreen or possibly a hedge for some of their munior corporate bond positions.Either way fading their calls have paid off in the last few years for the most part.

  • mad_dom

    Uh, Gundlach’s “core” bond fund trailed Gross’ Total Return fund over the past decade. Only Gundlach’s Total Return fund which is mostly in mortgages, was able to beat him for the past decade. People like to point out that Gundlach outperformed Gross but never mention that he was only able to do it, with a fund focusing on one sector. His core fund which invests in everything, like Gross, is more comparable. And he also did it with much smaller assets which is easier to do. Could he put up the same performance if he managed as much assets as Gross? Maybe, maybe not. Gross has over 200 billion in assets in his fund. Currently, Gundlach has about 6 billion in his fund. Much easier to outperform with 6 billion than it is with 200 billion. The guy who puts up the kind of performance that Gross has done with 200 billion, definitely deserves the reputation as the bond king, not the guy who barely outperforms him with only 6 billion. Incidentally, I own both of their funds.

  • http://www.pragcap.com Cullen Roche

    That’s like saying that Warren Buffett didn’t beat the S&P 500 because he consolidated his holdings in a few companies. You have a point that he’s been smaller. But the bigger point is, Gundlach has outperformed because he has been more focused on his best picks. Nothing forced Gross to grow Total Return to the ridiculous size it is today. But he chose fees over performance. Shame on him.

    Gross has really just been riding the wave of the greatest bond bull market in history and has been crowned some genius….almost by pure luck. When you study the man’s commentary it’s clear that he knows far less than most believe.

  • mad_dom

    Please. When bonds tanked in 1994, Gross’ fund dropped half of what Gundlach dropped. Seems to me that Gundlach needs a bull market more than Gross does. If you’re going to use Buffett as an example, I can easily point out the same argument. Buffett has really just been riding the wave of the greatest stock bull market in history and has been crowned some genius…. almost by pure luck.

  • http://www.pragcap.com Cullen Roche

    I think you’re jumping to conclusions by focusing on nominal returns. Study their methodologies. Study the way they both think. I don’t see how anyone could be familiar with their work and think that Gross is the superior money manager. But that’s just me….

  • JWG

    If we take Bill Gross at his word, he is betting that there will be a significant jump in interest rates when QE2 ends. He was wrong on the end of QE1; that turned out to be deflationary. What is different now? The Fed will not be shrinking its balance sheet now; QE Lite will continue. That alone is not nearly enough to offset the end of QE2 on a dollar basis (psychology aside). Gross must believe that foreign CBs will not be around in force, that the PDs will make a market only at significantly higher yields and that the Fed won’t intervene (at least initially) in a QE3 mode. Another four weeks or so should tell us if he’s guessing right this time.

  • BigH

    I think it’s a pretty bold claim to say that Gross is where he is by sheer luck. PIMCO is one of the very best in the business, they are one of the few investment houses which dare to actually take a non-consensus stance and go with what they feel is right. Honestly, I can’t see why you you’d talk down their achievement, or how you derive that they just got lucky. Seems pretty naive to me.

  • JJTV


    I would suggest reading “Big Bets Gone Bad: Derivatives and Bankruptcy in Orange County. The Largest Municpal Failure is US History”. Robert Citron was an idiot but many considered him to be a financial genius until everything blew up in his face. Bill Gross doesn’t understand sovereign debt markets; or at least creates the appearance he does not. Simply saying PIMCO Total Return has been a success does not correlate with Gross knowing what he is doing. It is probably likely that Bill Gross’s role/decision making is limited within the fund and most changes come from the advice of the overworked and lowly paid analysts. The $9Bn is probably all his advisors would agree to; considering the failure of his last call.

  • Dennis

    AIGFP was also ‘one of the best’ in the business. Until it wasnt. Many a formerly successful firm harbored the viper of idiocy within their bosoms that ultimately left these things on the heaps of history.

  • BigH


    I don’t doubt that Gross has made plenty of wrong calls and mistakes in his life, and I also don’t doubt that he is not a wise-man who knows everything. Still, here is a man with a multi-decade track-record of outperformance, so who cares if there were wrong calls in the way. It’s obvious that most (or at least the big) bets were right. Please don’t tell me he simply went long duration 20 years ago and never changes his allocation from there, winning due to the ‘luck’ of the market heading higher for over two decades.

    Bill gross is the world’s biggest bond manager, almost every major insitution has money in his Total Return Fund. He’s beaten the market for more than 20 years, with very few years of underperformance in the way. In fact, statistically speaking, this outcome is so unlikely that it really does not seem to be ‘luck’…

    In my mind, at least PIMCO has the guts to publish their calls on a pretty continual basis… this is quite in the contrast by the way to most market commentators who never make outright calls up or down so they cant be criticized after.

    The word ‘lucky’ for describing someone usually correlates with envy…

  • http://EUdebtforever.com Thomas Barton, JD

    Is PIMCO and Bill Gross an actual private entity or is it merely an extension of the NY Fed into the white world of public markets ? Doesn’t his discontent serve as a salve to the people who want the Fed Hawks to prevail right now ? I mean today on Bloomberg the face of PIMCO was none other than Neil Kashkali who was Paulson’s bag man at Treasury in 2008 ? These guys are like military brass who move seamlessly from classified black world black ops to white world public programs.

  • paul

    The end of QE2 will be Tepper’s call in reverse. Everything will go down — except the dollar.