PIMCO Wins Again

I was once told by an by a friend who left equities to work in fixed income that bond traders were vastly intelligent to their equity counterparts. I took it with a grain of salt, and truth be told this same chap is now managing a bottom decile equity fund at Lord Abbett after returning to the world of stocks.

But one thing is fersure, the guys at PIMCO are no dummies. Mohamed El-Erian's theme has treated PIMCO splendidly this year:

If you are a bond holder, you want to be ahead of a recapitalization...The equity holder wanted to buy emerging markets after they recapitalized in the late 1990’s, U.S. corporates after after they recapitalized in 2002 and 2003 on the back of Enron, Worldcom, etc. The timing is critical. For the bondholder’s it’s the other way around because a recapitalization lowers risk and therefore brings in spreads. PIMCO

PIMCO put its money where its mouth is, and aggressively bought agency debt ahead of Hank Paulson's plan to bailout the GSE's. Ahead of the rally in agency debt:

The so-called “explicit implicit” backing of the debt of twin mortgage finance giants Fannie Mae (FNM-NYSE) and Freddie Mac (FRE-NYSE) has established at least one bull market in battered financials, even if equity investors continue to fret about their position in the food chain.

Fixed-income investment shops are piling into the agency debt market in droves, as both the senior debt and mortgage-backed securities issued by the GSEs begin to look like a sure thing.

This past weekend’s passage of a sweeping housing bill by Congress, which includes new-found authority for the Treasury to backstop both of the GSEs, has likely only strengthened the market’s position in this area.

Debt issued by Fannie and Freddie has always held an implicit government guarantee. But the recent market turmoil, and passage of the aforementioned housing bill, has made that guarantee as close as it’s ever been to explicit. Yet agency debt has continued in recent weeks to offer yields at a 75-basis-point spread over Treasuries; and fund managers have clearly taken notice.

Of course, PIMCO got there first, and are reaping the rewards in another year of gangbuster performance against their peers. Bill Gross famously declared Treasuries to be overvalued earlier this year, and anyone who did not follow his lead has lagged.

The trade has gained in popularity over the past few weeks, and although it might be getting a little late to stampede in, Bill Gross is sticking to his guns:

“We like it,” PIMCO fund manager Bill Gross told Bloomberg. “This legislation has indicated to investors that Fannie and Freddie are not implicitly guaranteed, not explicitly guaranteed, but we’re close to that point.”

The resulting bull market, however, could be surprisingly short lived — booming demand may drive yields lower on agency debt at some point, something that Nomura’s Sobti is clearly paying attention to.

“If the spread over Treasuries was to reach 20 basis points, at that point we may consider shorting,” he told HedgeWorld.

PIMCO’s flaghship fund in nearly #1 against its peers in every time period, including the trading days since Hank Paulson rode in on his white horse.

Bill Gross, Mohamed El-Erian and PIMCO win again.
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A Bull Market for Agency Debt
Housing Wire

Mortgage Debt Least of Bad Bets as Investing Sinks
Bloomberg

Hat Tip FT Alphaville
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