PIMCO Makes Massive Bet That Bernanke Will Create Inflation

The last time we heard from PIMCO, the gigantic bond house was back to buying long bonds, betting on deflation.

And we know that the firm’s chief mouthpiece, Mohamed El-Erian has been warning about this scenario, pegging the odds at about 25% (it’s not his base-case scenario, just a substantial risk).

But obviously this isn’t the whole story.

The firm is also betting against deflation.


Bill Gross’s Pacific Investment Management Co. made an $8.1 billion wager that the U.S. won’t suffer a decade of deflation like the one that crippled Japan starting in the 1990s.

That’s the notional value of long-term derivative contracts tied to the U.S. consumer price index that Pimco’s mutual funds entered into during the first half of this year, according to a regulatory filing. The funds received $70.5 million in up-front premiums under these contracts, known as inflation floors, in return for agreeing to pay investors should prices decline in the 10 years ending in 2020.

This sounds similar to Warren Buffett’s big S&P Index Puts — betting in favour of long term stability — raising cash upfront.

Anyway, this is a bet, for now, on Bernanke, that when push comes to shove, he won’t let prices fall. Once again, they’re shaking hands with Uncle Sam.

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