Nov. 24 (Bloomberg) -- Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., increased his holdings of government-related debt to 63 percent, the highest proportion since July 2004.

Gross boosted his $192.6 billion Total Return Fund’s investment in Treasuries, so-called agency debt and other U.S. government-linked bonds from 48 percent of assets in September while reducing his position in mortgages to the smallest since May 2004, according to data on Pimco’s Web site yesterday.

Gross said in his December investment outlook last week that the “systemic risk” of new asset bubbles is rising with the Federal Reserve keeping interest rates at record lows. Under what Pimco has termed the “new normal,” investors should be prepared for lower-than-average historical returns with heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy.

With unemployment at a 26-year high of 10.2 percent, Gross said the central bank is unlikely to raise interest rates until nominal gross domestic product increases 4 percent to 5 percent for another 12 months.

“With unemployment in the double digits and likely to stay close to that for the next six months despite job creation ahead, the Fed has no where to go,” Gross, co-founder and co- chief investment officer of Pimco, said in a Bloomberg Television interview on Nov. 19 from Newport Beach, California.

Fed Chairman Ben S. Bernanke said after a Nov. 16 speech in New York that it’s “not obvious” that asset prices in the U.S. are out of line with underlying values after a 64 percent jump in the Standard & Poor’s 500 Index from its March low.

Government Debt

Treasury three-month bill rates turned negative on Nov. 19 for the first time since financial markets froze last year on concern that the rally in higher-yielding assets has outpaced the prospects for economic growth.

Mark Porterfield, a Pimco spokesman, said in an e-mail that the company doesn’t comment on fund holdings.

Pimco’s government-related debt category can include conventional and inflation-linked Treasuries, agency debt, interest-rate derivatives and bank debt backed by the Federal Deposit Insurance Corp., according to the Web site.

The fund’s holdings of mortgage debt fell to 16 percent of the portfolio by market weight from 22 percent the month before, matching their smallest percentage of the assets since May 2004. Investment-grade corporate securities rose to 18 percent of the fund from 17 percent in September, while high-yield bonds fell to 1 percent from 2 percent, according to the Web site.

Cash Equivalents

The Total Return Fund returned 19.7 percent in the past year, beating 54 percent of its peers, according to data compiled by Bloomberg. The one-month return is 1.04 percent, outpacing 85 percent of its competitors. Pimco is a unit of Munich-based insurer Allianz SE.

Cash and equivalent securities comprised negative 7 percent of holdings in October. These assets can include commercial paper, short-term government and mortgage-backed securities, short-term company bonds and money market derivatives.

The fund can have a so-called negative position by using derivatives, futures or by shorting.

Derivatives are financial obligations whose value is derived from an underlying asset such as debt, stocks or commodities. Futures are agreements to buy or sell assets at a later specific price and date.

Shorting is borrowing and selling an asset in anticipation of making a profit by buying it back after its price has fallen.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net.

Last Updated: November 23, 2009 17:27 EST