PIMCO/Bill Gross being investigated for Gunning shorts on the 10 yr

Discussion in 'Wall St. News' started by fxpeculator, Aug 8, 2005.

  1. The inaccessibility of the cheapest-to-deliver bond caused the price of the June futures contract to rise, because the market expected more-expensive bonds to be delivered. This created an unusual opportunity for anyone who was holding the cheapest-to-deliver bond to make money by selling them at the higher futures price.

    If any investor who owned the bonds withheld them with the specific intent of manipulating the futures market, that could be illegal under rules of the Commodity Futures Trading Commission, the federal regulator for the futures market. But that is a high legal standard that has proved difficult for the CFTC to meet in previous cases. A CFTC representative declined to say whether the commission was investigating the matter.

    June 29, in an effort to avoid a repeat of what occurred in June, the CBOT issued a new rule saying no single entity could demand delivery of bonds on more than a limited number of contracts -- 50,000 in the case of the 10-year Treasury note. The new rule doesn't take effect until December, but it caused the price of the September futures contract to fall, because it cut the demand for bonds that could be delivered. That caught many futures players by surprise and led to big losses on the September contract.

    "It caused major pain to Wall Street and to hedge funds," says Chas Mancuso, a futures broker at Fimat USA LLC, a unit of French bank Société Générale SA. He estimates the losses might have reached $500 million. The Futures Industry Association, a trade group, issued a letter to the CBOT severely criticizing the rule change.

    Treasurys


    Treasurys ended slightly lower after a disappointing $13 billion sale of five-year notes spurred fear that foreign investors are losing interest in U.S. government securities.

    The bid-to-cover ratio, a general measure of demand, stood at 2.92, up from the 2.46 average of the past 10 auctions of five-year notes. But indirect bids -- those from foreign official accounts and others that don't bid directly through the Treasury -- represented only 22% of the $12.8 billion in total competitive bids accepted. That was well below the 30% in July's five-year sale and the 39% average in such auctions in the first seven months of the year.

    Monday, a Treasury three-year note sale also saw much lower indirect participation than dealers had hoped. Pending release of government-auction data next month, it won't be clear how much less foreign institutions bought. Still, the latest auction results "give us the sense that foreigners are taking a pause," said Ralph Axel, fixed-income strategist at HSBC in New York.

    At 4 p.m., the benchmark 10-year note was down 2/32 point, or 62.5 cents per $1,000 face value, at 97 27/32. Its yield rose to 4.398% from 4.392% Tuesday, as yields move inversely to prices. The 30-year bond also was down 2/32 point, at 111 29/32 to yield 4.580%, up from 4.576%.

    http://online.wsj.com/article/0,,SB112368580566209811,00.html?mod=home_whats_news_us
     
    #21     Aug 11, 2005
  2. and again .... other than Gross saying he didn't engineer all of this he basically said nothing.

    I find his comments usually just a bunch of marketing noise ......

    The PIMCO team is comprised of an excellent set of strategists and they are very sharp about not intentionally violating regulations in these situations .... basically things are discussed very carefully and their audit and compliance systems are stellar ...
     
    #22     Aug 11, 2005
  3. dude...equities are skanks. fixed income is sexy. and otc cdo's are underage pornqueens.
     
    #23     Aug 11, 2005
  4. This is ingenious. My congratulations to Bill Gross.
     
    #24     Aug 11, 2005
  5. Maybe it was planned ...but I doubt it. More likely it was a beneficial side-effect of poor decisions by others ......
     
    #25     Aug 12, 2005
  6. http://online.wsj.com/article/0,,SB112432947553816290,00.html?mod=us_business_whats_news


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    Hedge Fund's Role
    Dents Market Theory
    On Treasury Shortage

    By MARK WHITEHOUSE and GREGORY ZUCKERMAN
    Staff Reporters of THE WALL STREET JOURNAL
    August 18, 2005; Page C1

    A Chicago hedge fund played a key role in a shortage of 10-year Treasury notes this summer -- an event that prompted regulatory changes and turmoil in derivatives markets, market professionals say.

    The hedge fund's role puts a dent in market speculation that one investor had intentionally created the shortage by simultaneously buying futures contracts, which represent the right to demand delivery of bonds, and hoarding the bonds needed to fulfill those contracts.

    More likely, say market professionals, the trouble in Treasurys demonstrates a larger trend: Hedge funds and other investors have piled into the futures market, causing it to triple in size over the past five years, while the supply of bonds cheaply available to fulfill these contracts has dwindled.

    "It may just be the natural outcome of higher futures volumes and smaller deliverable Treasury issues," says Eric Flanagan, managing partner of EMF Financial Products LLC, a hedge fund active in the futures market.

    Bond-market professionals say hedge fund Citadel Investment Group LLC, in what appears to have been a profitable investment, accumulated as much as $8 billion of a single issue of 10-year Treasury notes sometime in late May -- more than half the amount readily available in the market. The fund's holdings were so large that other investors had a hard time obtaining the notes when one of the world's largest bond-fund managers, Pacific Investment Management Co., or Pimco, put itself in a position to take unusually large deliveries on a June futures contract.

    Typically, big holders of futures contracts will shift their holdings into the next available contract before the current one expires. In this case, trading the June contract for the September was prohibitively expensive. Pimco has said it didn't mean to disrupt the market. A Citadel spokeswoman said that the fund neither confirms nor gives details of specific trades.

    The shortage of 10-year notes proved costly for many investors, who had to pay a premium to get them, and caused deliveries in other parts of the bond market to fail. In an effort to avoid a repeat of the problem, the Chicago Board of Trade, the futures exchange, imposed new limits on the number of bonds any one contract holder could demand be delivered -- a remedy that traders say unintentionally cost investors hundreds of millions of dollars by reducing the value of the September contract. Last week, CBOT issued a letter saying it stands by its rule change.

    Under rules of the Commodity Futures Trading Commission, the federal regulator for the futures market, it is illegal to intentionally create a bond shortage -- known as a "squeeze" -- by purchasing futures contracts and hoarding bonds eligible to fulfill them. Such manipulation can be profitable, because some bonds deliverable into a contract are usually less expensive than others are: Locking away the least expensive bonds forces investors who have sold futures contracts to deliver more expensive bonds and increases the value of the futures contracts.

    By contrast, investors who have sold futures contracts often hoard cheapest-to-deliver bonds ahead of a contract's delivery date -- a practice that isn't only legal, but also necessary to avoid stiff penalties that the CBOT levies on anyone who misses a promised delivery.

    If, for example, Pimco demanded delivery of bonds under the June contract and Citadel locked away the bonds ahead of time to be sure it could make the delivery, the trades wouldn't violate any rules. A CFTC spokesman declined to say whether the commission was looking into the matter.

    Large deliveries are rare in the futures market. But exchange records show that one account delivered $8.2 billion in Treasury notes maturing in February 2012 -- the cheapest to deliver for the June contract.

    Meanwhile, the total value of February 2012 bonds in Pimco funds increased to $11.4 billion on June 30 from $2.8 million on March 31, according to mutual-fund research firm Morningstar Inc.

    Without the details of Citadel's trades, it is hard to know how much the fund might have profited from the investment that market professionals say it made.

    In late May, the price of the June futures contract was effectively higher than that of the 10-year Treasury note maturing in February 2012. Any investor who bought $8 billion in the notes and sold the same amount in futures contracts, traders say, could have made $5 million, based on the price difference between the two.

    Other investors' desperation to obtain the notes affected a separate market, where investors lend bonds to one another in return for short-term cash loans -- the so-called repurchase, or repo, market.

    At one point, investors seeking to borrow the February 2012 notes were offering to pay 30% annual interest on the bonds' market value.

    Usually, borrowers of bonds receive interest on the cash loans they provide.

    Also, many investors who had borrowed the bonds failed to return them.

    Write to Mark Whitehouse at mark.whitehouse@wsj.com and Gregory Zuckerman at gregory.zuckerman@wsj.com
     
    #26     Aug 18, 2005
  7. ktm

    ktm

    Bill Gross got the short end of this...read the article in today's WSJ. Citadel made the money.
     
    #27     Aug 18, 2005
  8. Is it illegal for citadel to do this?
     
    #28     Aug 18, 2005
  9. ktm

    ktm

    Did you read the article?
     
    #29     Aug 18, 2005
  10. Today's In Play


    08:18 Pimco Sued by Investor Alleging Manipulation of Bond Futures -- Bloomberg.com

    Pacific Investment Management Co., manager of the world's biggest bond fund, was sued by an investor alleging the firm manipulated the price of June 10-year Treasury futures contracts on the Chicago Board of Trade. Raymond Chiu claims Pimco violated the Commodity Exchange Act through "manipulative conduct'' that created "artificially high prices'' in the futures market to its benefit. The suit, filed on Aug. 16 in U.S. District Court in Chicago, seeks class- action status.
     
    #30     Aug 19, 2005