PIMCO & Bill Gross: Long on Bonds

Here's an excerpt from an interesting article on bonds.  We are currently "long" bonds as well; our models have been long bonds for a long period of time.

This report from one of my favorite blogs, Zero Hedge, fleshes out the details [emphasis added]:
…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).
That’s a big boost in government securities. The question is why are they doing this?  The ZH folks believe this is a ‘tell’ or an indication that Gross believes the Fed is going to intervene in the bond market in a big way by buying long maturity bonds.  That makes sense, but there may also be a simpler explanation, which I’ll get to in a moment.  ZH continues with thoughts on what the latest Fed intervention — Operation Twist or Torque or whatever it will be called — will do:
…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.Earlier this year, Gross openly moved out of U.S. Treasury holdings and made a bet on higher interest rates.  That did not happen.  However, as all good portfolio managers do, when he’s wrong, he changes course.  Now, he has done that in a big way by going long and going back into government securities. ZH continues with a discussion of changes in the duration or average weighted maturity of the portfolio:
…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)…
Pimco Total Return is changing its portfolio in two ways:

• Duration: 
First, it is extending the duration to go long.  And, make no mistake, a duration of 6.27 years is at the long end of the range for this fund. I chatted with Kevin Winters of Pimco to get some clarification about the fund’s duration policy.  The policy is to operate in a range of up to two year over (or under) the Barclays Capital Aggregate Bond Index.   Currently, the BarCap Aggregate is about five years, so Pimco could actually go up to seven years duration.

• Government securities: 
The second portfolio change is that the fund is moving more aggressively into U.S. government securities.

Both lengthening duration and moving strongly back into government securities are big changes from earlier this year. The question I asked myself is why are they making these changes?  The ZH folks believe this is a ‘tell’ that Gross believes the Fed is going to intervene in the bond market in a big way.  That makes sense, but there may also be a second and more important explanation. 

Read more here: http://blogs.marketwatch.com/fundmastery/2011/09/13/bill-gross-pimco-going-long-again/

Stock Indicators, A Look at Futures

A quick update on our stock market indicators:

• Our overbought indicators are still flashing the warning signs we mentioned last week.
• Our long-term and short-term indicators remain bullish/long.

Overall, we have remained slightly long as the market has continued its rally -- albeit with relatively modest position sizes. Some other market sectors have been helping our portfolio recently -- namely some futures markets.

Gold has been in a sustained trend higher, rising from the mid 900-range (just a few weeks ago), breaking through the 1000 milestone mark -- and is now reaching contract highs around 1020. Gold is poised to spike through to new highs, or may consolidate before continuing its run.

In other futures markets:

• Sugar is reaching multi-year highs.
• ECU & Yen strong vs. US dollar.
• Bonds continue to move higher.
• Crude oil is volatile as usual, but is trending higher.
• Grains and meats are generally lower.
• And as we mentioned, gold is very bullish. Other precious metals and copper are also moving higher.

Futures Sectors

We invest -- and trade -- in the major liquid futures markets, focusing on the US markets. Note that we have also traded international commodities such as London metals and Japanese Commodities (Tocom Rubber, Azuki Red Beans). Recently, we mentioned that many of these sectors have become correlated with the stock market during this recent sustained equity rally. Traders in these markets are probably aware of this -- but should make special note of this to avoid having undue concentrated risk in their portfolios.

Here is a look at the major futures market sectors in which we invest. We like to use the word "invest" because we believe that we extract risk premiums that are left in the marketplace by hedgers and other market participants.

• Stock Index Futures
• Interest Rates
• Currencies
• Metals (precious metals and industrials)
• Energy
• Grains
• Meats
• Soft Commodities (coffee, cotton, sugar, OJ, cocoa)

Markets we trade

We have traded just about every liquid futures market around the globe. Today, our focus is on the US markets, including all liquid futures markets (index futures, interest rates, currencies and commodities) as well as stocks and options.

We also trade foreign index futures such as the Nikkei.