3 Overreactions To PIMCO’s Probe

September 25, 2014

The PIMCO investigation has turned a spotlight on bond pricing.

My piece yesterday talking about the SEC investigation of PIMCO’s pricing mechanics in the PIMCO Total Return ETF (BOND | B) raised more than a few eyebrows. It also generated some email traffic and broad comments, which I’ll be generous and call “heated.” Apparently, there are a lot of folks out there who feel very strongly one way or another about this. It seemed like answering a few questions here might be easier than writing 100 emails saying the same thing.

First off, I want to be clear: I don’t have any more information than anyone else about exactly what the SEC thinks PIMCO might have done, or whether PIMCO actually did whatever the regulators think it did. I was responding to the same news story everyone else read, which suggested that PIMCO was buying at a discount, then using a pricing service to value its bonds. I stand by my belief that both of these are not only standard practice, but pretty much the only option.

If in fact the SEC thinks PIMCO is doing something different and nefarious, well of course they should be held accountable. And by “they” I really mean the fund board, which is the watchdog on pricing policies.

With that out of the way, let’s look at a few common objections to what I wrote yesterday.

“Dave, BOND is going to tank, and the market’s never going to trust PIMCO’s prices again!”

Most of the comments along these lines came at me in the afternoon, when this “scary” chart was unfolding:



The blue line here is how BOND actually traded yesterday. The black line is the intraday net asset value being reported for BOND. Look at how it fell out of bed! Trading to such a crazy discount! The problem is scale. BOND traded to a discount of 0.11 percent. This is entirely within the bounds of PIMCO’s daily fluctuation from reported value. Just look at the last 10 days:





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