It appears that PIMCO, the world’s largest bond fund may have benefited (it appears legally) by virtue of its close relationship with the Federal Reserve. Moves by the Fed appear to have been broadcast to the investment firm and as such PIMCO was able to get in very early and to buy up a piles of mortgage backed securities (MBS) just before the Fed announced that it would start buying piles of mortgage backed securities.
The giant fund-management firm, led by co-founder Bill Gross, started buying tens of billions of dollars in mortgage-backed securities guaranteed by federally sponsored agencies like Fannie Mae and Freddie Mac. In the third quarter of 2011 alone, Pimco’s flagship Total Return Fund, the world’s largest mutual fund, doubled its holdings of these securities to $80 billion, according to a Reuters review of trading and other data.
While Pimco was building its hoard, the Fed, in a surprise move long before any word on quantitative easing, said it would start buying more of the same kind of debt, known in the trade as “agency MBS.” The U.S. central bank would acquire as much as $30 billion of the securities a month by reinvesting proceeds from its earlier purchases. Prices rose.
As 2011 slid into 2012, Pimco started enjoying big gains on its agency holdings. Even better, the Fed in September 2012 finally announced a third round of quantitative easing, nicknamed QE3. To keep supporting the U.S. housing market, it would buy even more agency MBS. Pimco’s Total Return Fund posted billions more dollars in gains.