PIMCO’s Gross admits he struck out on bonds this year

In a Special Edition letter posted on PIMCO’s website, Gross, who runs the $242 billion PIMCO Total Return portfolio, wrote that he underestimated the contagion effect from the Europe debt crisis and the U.S. debt ceiling debacle.”As Europe’s crisis and the U.S. debt ceiling debacle turned developed economies toward a potential recession, the Total Return Fund had too little risk off and too much risk on,” said Gross, who also shares the title of co-chief investment officer at Pacific Investment Management Co. with Mohamed El-Erian.Gross, known as the “bond king”, came under heavy criticism earlier this year when he bet heavily against U.S. Treasuries which have turned out to be one of the biggest outperformers of 2011.His fund’s poor performance led Gross to simply call his open letter to investors, “Mea Culpa.”It is up only 1.06 percent year to date versus the benchmark BarCap U.S. Aggregate Index which is up 3.99 percent.Gross, who helps manage more than $1.2 trillion at PIMCO, said late Friday the Total Return fund had positions in German bonds and Canadian Treasuries to counter the U.S. underweight position, “but not enough.”He added that minor percentages of emerging market corporate and sovereign debt, effectively denominated in their local non-dollar currencies, did not perform well either.”The simple fact is that the portfolio at midyear was positioned for what we call a “New Normal” developed world economy - 2.0 percent real growth and 2 percent inflation,” Gross said.That’s all changed, of course. Gross said PIMCO’s internal growth forecast for developed economies “is now zero percent over the coming several quarters and the portfolio more accurately reflects this posture.”Last week, Reuters reported that Gross ramped up buying of mortgage-backed securities in September, albeit by using leverage, on the likelihood the Federal Reserve’s reinvestment program in those securities will boost prices significantly.Gross increased mortgage debt to 38 percent of assets in September, from 32 percent in August, as the U.S. central bank announced last month that it “will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.”His move into mortgage-backed securities also comes as the PIMCO Total Return fund’s cash equivalents and money-market securities fell to negative 19 percent September, from negative 9.0 percent in August.In having a so-called negative position in cash equivalents and money-market securities, it is an indication of using derivatives and short-term securities as collateral in order to boost the fund’s buying power with leverage.Gross’ move to seek more yield by putting more money into mortgage bonds is yet another bold bet which many will be watching after Gross’s call on Treasuries cost his fund’s performance. In doing so, he is effectively extending the average duration of his fund’s investments, making them potentially more exposed to a rise interest rates.Clearly, Gross is betting interest rates will remain low for some time as the world economy continues to struggle.In his “mea culpa” letter, Gross resorted to baseball analogies and metaphors. He closed his letter by saying: “This is big league ball, where your ticket holders come to the park expecting not a circus-Willie Mays-catch but more wins than losses and a year-end performance that places your bond assets near the top of the standings.”He added, “Baseball metaphors aside, we know why PIMCO Total Return is arguably the largest and hopefully the greatest bond fund in the world.”

China’s CNOOC hit by fresh oil spill in northern waters-report

Maritime administrators announced an emergency and have sent a ship to the area after a belt of oil floated to the surface near a platform on the field on Friday. A construction ship struck an underground pipeline, the report said.It did not describe the scale of the spill and said the maritime administration ship was still investigating.Liaodong Bay is part of the bigger Bohai Bay, where CNOOC and its U.S. partner ConocoPhillips have been struggling with a spill in June that triggered government demands for tougher regulation of offshore oil operations.The leak from the Conoco-operated Penglai 19-3 oilfield released less oil in three months than BP’s Gulf of Mexico spewed out in a single day, but the response from Beijing was vehement.Last month, authorities ordered the shutdown of the 168,000 barrels-per-day field, in which state-run CNOOC owns 51 percent.CNOOC cut its output target, though the production loss is seen as having only a minor impact on supplies to the world’s No.5 crude producer.Chinese Premier Wen Jiabao said last month that the government will strictly control new petrochemical projects around Bohai Bay.

ECB raps Belgium for long-term Dexia guarantees

“The support scheme covers a time period of up to 20 years, as the loans covered by the guarantee may be issued until 31 December 2021 at the latest and may be for a maximum duration of 10 years, and thus could be considered of a longer-term rather than temporary nature,” the central bank said in a legal opinion.The ECB also said that debt guarantees should be given neither to bank loans with maturity of less than three months, nor to interbank deposits, as these could impair the implementation of monetary policy.The ECB is often asked for legal opinions on banking regulation issues in relation to transactions which can have a broad impact on the sector but has no teeth to enforce its view.In the past, however, its opinions have prompted changes in draft laws and decrees by national parliaments.(For a copy of the legal opinion, click on: here)

Slovak govt party head confirms deal on EFSF

“We decided that as the first point of (Thursday’s) parliamentary session, we will work on a proposal to shorten the voting period, with the goal of organising an election on March 10. Immediately after, tomorrow or Friday, we will debate proposals related to the EFSF,” said Mikulas Dzurinda, foreign minister under Radicova’s cabinet.