pimco/bill gross bets against deflation

[jk]

Pimco Makes $8.1 Billion Bet Against `Lost Decade' of Deflation

Bill Gross’s Pacific Investment Management Co. made an $8.1 billion wager that the U.S. won’t suffer a decade of deflation like the one that crippled Japan starting in the 1990s.

That’s the notional value of long-term derivative contracts tied to the U.S. consumer price index that Pimco’s mutual funds entered into during the first half of this year, according to a regulatory filing. The funds received $70.5 million in up-front premiums under these contracts, known as inflation floors, in return for agreeing to pay investors should prices decline in the 10 years ending in 2020.

etc

http://www.bloomberg.com/news/2010-0...deflation.html

[grapejelly]

Re: pimco/bill gross bets against deflation

Bill is a smart guy. But isn't it sorta kinda luck that he was in the bond market while bonds were in their bull market?

Now I think bonds are topped out and we are starting a long term bear market in bonds. Exactly when everyone has piled in. So this doesn't surprise me. But how will PIMCO fair when the bear gets going in earnest?

[jk]

Re: pimco/bill gross bets against deflation

gross revolutionized fixed income investing- instead of sitting on bonds he traded them, used futures, and so on to generate higher returns than his peers. that's how he got to where is. if there's a bond bear market, he'll shorten maturities, hedge, sell options and so on to produce returns beyond what a buy-and-hold bond portfolio would do. the sale of a deflation hedge, as described in the original post, is a clever way to generate extra return.

[karim0028]

Re: pimco/bill gross bets against deflation

gross revolutionized fixed income investing- instead of sitting on bonds he traded them, used futures, and so on to generate higher returns than his peers. that's how he got to where is. if there's a bond bear market, he'll shorten maturities, hedge, sell options and so on to produce returns beyond what a buy-and-hold bond portfolio would do. the sale of a deflation hedge, as described in the original post, is a clever way to generate extra return.

Thats exactly it! If he is betting against deflation (ie. believes inflation is coming) that means he is hedging his long bond position, bc he would be an idiot to hold on to unhedged 5-30 yr bonds in an inflationary environment...

[c1ue]

Re: pimco/bill gross bets against deflation

More importantly - what is the actual likelihood of deflation for the span of the next decade?

And what exactly is the counterparty attempting to accomplish?

[karim0028]

Re: pimco/bill gross bets against deflation

More importantly - what is the actual likelihood of deflation for the span of the next decade?

And what exactly is the counterparty attempting to accomplish?

There is always someone willing to take the other side of any trade.... Need to look no further than "house prices always go up!"... I am sure that there are alot of pension funds believing that deflation is coming (even though, clearly nothing is going down in price & they need to get a return of 8% to stay solvent) and trying to hedge their stock positions with deflation insurance, or something along those lines....

In other words, dont discount fund manager (or average persons) stupidity or ability to lose money.

[doom&gloom]

Re: pimco/bill gross bets against deflation

Bill is a smart guy. But isn't it sorta kinda luck that he was in the bond market while bonds were in their bull market?

Now I think bonds are topped out and we are starting a long term bear market in bonds. Exactly when everyone has piled in. So this doesn't surprise me. But how will PIMCO fair when the bear gets going in earnest?

I was talking to a broker I know (who works with big money clients) about my farming investment(s) in Uruguay and how things were going. the conversation afterwards went something like this:

Me: So Bud, where is the big money investing nowadays?

Bud: Bonds, everyone wants to buy bonds. I can't seem to sell enough bonds.

Me: I think those people are gonna get killed in a few years.

Bud: Yeah, well, I gotta think of something to do in th next two years...

Me: Two years? you're not that old that you can retire yet.

Bud: Hell no, but I figure in two years all these bonds are gonna blow up and no one is gonna do any business with me. I am not selling them, they just keep calling and uying them. this is gonna be really bad and I don;t want to be around for the aftermath. So, what can I do in Uruguay?