Bill Gross, the co-chairman of one of the largest bond funds, PIMCO's Total Return fund which closed 2011 at a whopping $244 billion dollars, has added to its leveraged Mortgage Backed Securities position during December 2011, in a bet on further Quantitative Easing and further "Operation Twist". According to Zerohedge, the Total Return fund had in December a $60 billion cash margin account used to purchase $103 billion in MBS, TIPS and long duration US treasuries. Turns out that in December, Bill borrowed an additional $78 billion to purchase more MBS and treasuries.
PIMCO's Total Return Fund
The bond fund has seen a surge in assets under management from early 2007 when it first reached the $100 billion AUM yardstick to what is now $244 billion. It is now holding a 79% of assets in long duration fixed income as they are betting that FED will converge the long term yields with the short term ones, in order to bring the cost of financing down. This may prove costly if his prediction is wrong and the FED chairman allows a tightening of the credit system. Needless to say that Bill was wrong in March 2011 when his Total Return Fund was net short Treasuries, and mistimed one of the biggest bull upturns since the financial crisis.
But, something tells me that this time is different: FED will monetise and if it is not going to announce it on its 25th of January meeting, it certainly will at a subsequent meeting. The result will be another year of inflated stock market valuation and commodity prices.