Pimco Bets The Farm On Mortgage Debt

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The Pimco Total Return, run by highly-worshiped bond manager Bill Gross, is putting most of its chips into mortgage debt. The fund, which manages $130 billion, is counting on the federal government to make the bet work.

According to the FT "Mr Gross said his decision to raise exposure to mortgage debt in recent months was based on the US government’s implicit guarantee of Freddie Mac and Fannie Mae, the government-sponsored mortgage agencies."

Gross is usually right, but, with his exposure to mortgage-related paper tripled over that last few months, he could be facing his Waterloo. The housing crisis in the US could still get much worse. Recent data shows that housing prices are still falling. Consumer ability to pay housing debt is being hurt by rising costs of food and fuel and unemployment, which is edging up. A number of subprime ARMs will reset through the summer.

Pimco has been an unusually good performer over the last decade. Nothing good lasts forever.

Douglas A. McIntyre