Sept. 17 (Bloomberg) -- Bill Gross's Pimco Total Return Fund, the world's largest bond fund, fell 1.4 percent yesterday, the biggest one-day decline in more than three years, according to data compiled by Bloomberg.

The loss, which compared with the 0.38 percent drop by the benchmark Lehman Brothers Aggregate Bond Index, came as the U.S. government moved to seize American International Group Inc., the largest U.S. insurer. The fund guaranteed $760 million of AIG debt as of June 30, part of a larger bet by Gross that some beaten-down corporate bonds will recover because they are too important for the government to let fail.

``It's not surprising to see some gyrations in a fund like Pimco Total Return,'' said Lawrence Jones, a senior mutual-fund analyst with Chicago-based Morningstar Inc. ``We're clearly not under normal market conditions now.''

Yesterday's decline was the most since Pimco Total Return's net asset value dropped by 3 percent on Dec. 13, 2004, when investors received short- and long-term capital gains dividends of about 33 cents a share.

Mark Porterfield, a Pimco spokesman, wasn't immediately available for comment.

Pimco Total Return gained 1.3 percent on Sept. 8 after the U.S. took control of mortgage-finance companies Fannie Mae and Freddie Mac. The increase exceeded the advance of the Lehman Brothers index by about 0.5 percentage point, its best performance against the benchmark.

The fund, run by Pacific Investment Management Co. of Newport Beach, California, had $132.3 billion in assets as of Aug. 29.

Beats Rival Funds

Gross's fund has fallen 2.3 percent since Sept. 8, reducing the gain this year to 2.8 percent. It ranks ahead of 92 percent of similarly managed funds, Bloomberg data show.

Gross, 64, Pimco's co-chief investment officer, has made successful bets on mortgage-backed securities, Morningstar's Jones said. About 65 percent of the fund's holdings were mortgage-backed securities on June 30.

Gross also favored bonds of corporations that were ``under the Fed umbrella,'' meaning they were so big or important to the U.S. or global financial markets that the government couldn't allow them to fail, Jones said.

The fund has ``held up well under some extraordinary conditions,'' Jones said.

To contact the reporter on this story: Matthew Keenan in Boston at mkeenan6@bloomberg.net.

Last Updated: September 17, 2008 17:04 EDT