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Gross Uses Sly Semantics to Hide Shorts on Government Securities

-- Posted Wednesday, 18 May 2011 | | Disqus

By: Dr. Jeffrey Lewis


Bill Gross, manager of PIMCOs Total Return Fund, the largest mutual fund in the world, claimed that reports indicating he was net short on US Treasuries were apparently part of a gross misunderstanding.  Having reported this news to our readers, we thought it absolutely important to continue following up on this story until it reaches its conclusion.


After the Total Return fund noted that it had gone short government debt in April, investors took notice, and word spread quickly that the world’s greatest bond investor, none other than Bill Gross, had shorted US Treasury securities.  Today, nearly a month after the news began to circulate around the financial markets, Gross says this simply wasn’t the case.


Instead, he contends that his fund had never shorted US Treasuries, which conflicted with SEC filings that showed otherwise.


In truth, PIMCO wasn’t ever short US Treasury securities.  PIMCO was, however, short debt issues that are US government-related.  The column in the SEC filing to which this short-position is attributed can include anything from T-bills and bonds to agencies (MBS debt, mostly), interest rate swaps, Treasury futures, and FDIC-insured debt, since the FDIC is a member of the US government.


The short sale, which was then worth only 3% of the fund’s $240 billion in assets, or just under $7.5 billion, has since been upped.  In just one month, Bill Gross has not only emerged to suggest that he’s not short US Treasury securities, but he has also doubled-down on his short positions, adding to the position so that as much as 4% of the current Total Return Portfolio is now short US government debt.


The Reality


The reality of the situation is that Bill Gross may not have shorted US Treasuries, but he has absolutely shorted government-related debt to the tune of nearly $10 billion.  To imply that he had not done so is at best disingenuous, and at worse, a careful play on investors’ misinterpretation of the semantic difference between Gross’s spoken word and his big bets against US government debt.


In all reality, there is very little difference between US Treasury debt and US government-related debt.  While mortgage-backed securities may be backed primarily by the hundreds of millions of mortgage payments that flow into Fannie Mae and Freddie Mac each month, they are, as they have been for the past two years, backed also 100% by the full faith and credit of the US taxpayer.  FDIC-insured securities are also backed by the US government.  When you go to purchase either of these securities, you care very little if the original institution can make good on their debt—who cares when the US Treasury is the one to bail them out?


The reality of the situation is that for Gross to go short US debt in any fashion is the equivalent of going short US Treasuries, just as it is the equivalent of shorting Agency debt, Treasury futures, interest rate swaps, and a myriad of other investments that are all backed by the US Government. 


Gross is short the US Government’s debt, regardless of whether or not it’s US Treasuries, FDIC-insured short-term credit facilities, or interest rate swaps which would leave PIMCO rolling in paper money should US Treasuries fall after the Fed ceases to monetize the debt.


One has to wonder why Gross, a man who has long been the king of the bond markets, would ever come out to make a statement based purely on semantics.  Someone had to have encouraged his announcement; otherwise, it makes little sense why Bill Gross himself would ever suggest that semantic differences really change the game here.


In effect, what Gross just said could be explained in other words as, “I didn’t short Treasuries; I just shorted other US Debt that has a different name.” 


Dr. Jeffrey Lewis

-- Posted Wednesday, 18 May 2011 | Digg This Article | Source:

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