MBS MID-DAY: Yes, The PIMCO/Gross News is Really Moving Markets

GDP came in this morning at a whopping +4.6%, so bond markets are losing ground due to the strong economic data, right?

Wrong...

Bond markets moved this morning because the Founder and CEO of the world's largest bond fund left the company, allegedly in lieu of being fired.  Here's the background story.

Let's put this in perspective.  Even after Gross's bond fund suffered massive losses over the past year, it still has over $200 billion in assets under management.  To get an idea of how big that is, check out this list.  Long story short, it's a Wall Street institution.

While Gross has taken a lot of criticism over the past year, and while some of that is very well-deserved, there are still plenty of investors who will continue to view him as "the bond king."  Today's weakness was a result of expectations that this massive bond fund would see massive redemptions (i.e. people pulling their money out of it).  They might not even necessarily do this to follow Gross to his new home at Janus, but simply because the fund is no longer going to be managed by the same person.

Investors who do pull money out of the PIMCO fund will most likely put it back to work in a bond fund, but as you can imagine, they might need a moment or two to decide which fund will get their money.  Some will follow Gross.  Some will choose a new fund.  Some will reinvest with PIMCO after they've had a chance to research the new fund manager and digest any other changes.  But one thing is for sure: a large amount of money will be leaving the PIMCO fund, and that means PIMCO has to sell bonds.  Investors sold this morning to get out in front of that guaranteed fact.

Can this stuff really move markets that much?  Absolutely.  Money managers are one of the most important investor classes when it comes to bond market movement, and today's news directly impacts the single largest managed bond fund.  It clearly sent Treasury-specific shockwaves through today's trading.  Fortunately, MBS have been much less-affected by comparison, and the ill effects reached their apex before lenders were out with rate sheets.