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PIMCO in Bed with the Fed: Coordinated MBS Purchasing Programme

Great catch (as always) over at ZeroHedge this evening.  Tyler noted that PIMCO has been ramping up its Mortgage Backed Security purchases for the past two months.  The current MBS allocation that hasn't been this large since July 2009.  Look at the spike in the red line (MBS):

Tyler argues that Bill Gross' aggressive buying could only have two outcomes in mind:

...either Gross knows that the Fed will have no option but to promptly shift from monetizing MBS in addition of USTs (now that rates have once again started leaking wider)... or the firm is convinced it will be successful in getting the BofA's to accept all of its putback demands, and possibly more.

I think Tyler has misfired here, because a third, more probable option exists: is PIMCO truly the fourth branch of the US government?

Yes, I did say more probable.  Hat-in-hand, the Fed just may have approached PIMCO.  With QE2 lite just rolled out, it's politically & practically wise for the government to fear another printing programme so soon.  The US Dollar slid in the buildup to the FOMC's November 3rd announcement of a $600bn initial draw from the 'QE2 flexible, bottomless credit line.'

I've beaten the drum tirelessly on these oscillating dollar spasms.  The Dollar has predictably swung back off the pivot of that QE2 announcement.  (European/PIIGS have aided the USD rally, but the damage to the Euro has been contained--so the FX markets say.)  How poetic of Mr. Bernanke to find solace in the concept of destruction as a form of creation: elegantly, this USD repair is necessary if the Fed plans to continue wringing asset growth out of the Dollar's demise.

The bifurcation in the prices of food & housing is a scary development.  Increasing costs at the supermarket compounded by eroding equity in homevalues only exacerbate the wounds of our consumer base.  Thus, the Fed has to let this pendulum swing to center under its own inertia.

So how to resolve the problem of runaway interest rates?  The government cannot pump more liquidity to pin rates in an environment where inflation is taking hold in the wrong places.  At the same time, it can't sit idle while rising rates lay waste to the "recovery."

Much like the resolution proposed in a PPIP, a private intervention is far preferred to a public one when a government (and a currency) feels overextended.  PIMCO is certainly the prime nominee to undertake a mass MBS purchasing programme to corner a swath of the floating supply until the Fed buys time to let the QE2 announcement wane. Yes, Tyler, the reasonable backdrop of mortgage putbacks and future Fed MBS purchases cartainly sweetens the deal for Mr. Gross.

Disclosure: No positions