Investor Sues Pimco Over Bond Squeeze

An investor has filed suit against bond behemoth Pacific Investment Management Co., or Pimco, for allegedly orchestrating a shortage of 10-year Treasury notes in the overnight repurchase market.

The complaint, led by Raymond Chiu and filed in an Illinois federal district court this week, seeks class-action status.

Newport Beach-based Pimco manages about $460 billion in fixed-income assets.

Mark Porterfield, a Pimco spokesman, said in a statement: “We strongly believe the complaint is without merit and we intend to vigorously defend ourselves.”

Bill Gross, managing director of Pimco, has denied that his company played any role in a so-called squeeze of the 10-year June Treasury futures contract, which caused unsettled transactions, or “fails,” when investors were unable to deliver promised Treasury notes.

In the repurchase market, a supply-and-demand mismatch can be exploited by some investors, who can hold back lending a large amount of the issue and force other investors to pay exorbitant amounts to cover their positions. This creates a situation known as a squeeze that can ultimately trigger fails. Because securities are lent and borrowed in a chain among investors, a fail can trigger a major rupture in the financing of Treasury and futures positions.

The lawsuit alleges that Pimco purchased $10 billion of June 10-year futures contracts and owned “billions of dollars worth of cheapest to deliver notes” that would be needed by investors to fill those very futures contracts when it came time to deliver. The plaintiff alleges that Pimco attempted to corner the market by holding onto these positions simultaneously.

Earlier this month, Pimco’s Gross told CNBC that delivery problems seen in recent months were more likely rooted in a structural change in the bond market, where open interest in futures contracts had nearly tripled while cash securities grew more scarce.

Neither Chiu nor his lawyers could be reached for comment.