Why Pimco's Purchase Of Another $30 Billion In MBS (Much Of It On Margin) May Be Very Bad News For Bank Of America (And Taxpayers)

Bill Gross continues to telegraph that an MBS monetization announcement is just a heart beat away. Either that, or the firm is now fully convinced it will be able to putback every single MBS in its book (and then some) to some soon to be sad shell of a bank (read- Bank of America and/or Wells Fargo). In October, Pimco's Total Return Fund saw its margin cash jump by the most since February 2009: the time when the full QE1 was announced: at $28.1 billion in margin cash, the firm increased it dry leverage powder from $7.6 billion to $28 billion. And where did this money go? Virtually all of its went in Mortgage Backed Securities, which stood at $100 billion as of October 31. This is a $50 billion increase in the past two months, and brings the total to the highest since February 2009, again - just before the Fed started monetizing UST and MBS/Agency debt in earnest. And even as the firm was lifting every MBS offer, it dumped Treasurys: it only had $71.7 billion at the end of Ocotber, down from $83.2 billion a month earlier, and making MBS the top TRF holding (first time since July 2009). As Gross never does anything without a reason (and fundamentals are never a "reason" for the Fashion Island denizens) there are only two possible explanations: 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), a topic we have covered repeatedly in the past, of the firm is convinced it will be successful in getting the BofA's to accept all of its putback demands, and possibly more. As both outcomes will result in a material profit on all recent purchases, the bottom line is that taxpayers (either via QE or via TARP2) are about to make the GEM (Gross-El Erian-McCulley) even more valuable.
Full spread of TRS per latest October results:

And here is the duration distribution of the TRF: while less relevant to how much lube taxpayers will need to buy, what is notable is that PIMCO now has the most holdings in the 1-5 year space since November 2009, and the least in the 10+ Year bucket since July 2009.