July 20 (Bloomberg) -- Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., reduced holdings of mortgage debt last month and added to cash and equivalent securities.

Gross cut the $161 billion Total Return Fund’s investment in mortgage bonds to 54 percent of assets, the lowest in almost two years, from 61 percent in May, according to a report on Pimco’s Web site. Gross trimmed holdings of government-related bonds to 24 percent of assets, the least since February, from 25 percent.

In an investment outlook published earlier this month, Gross said investors should look for “secure income” offered by bonds and dividend-paying stocks. “The outlook for risk assets -- stocks, high-yield bonds, and commercial and residential real estate will involve just that -- risk,” he said in the July 1 report.

Economic growth will be slower and profit margins will be narrower than in the past decade, Pimco’s co-chief investment officer wrote in the report. An index of consumer confidence declined to 47 this month from 49.3 in June, according to a Bloomberg News survey of economists before the Conference Board’s report July 28, as rising unemployment undermines optimism the U.S. recession is about to end.

Mark Porterfield, a Pimco spokesman, has said the firm doesn’t comment on fund holdings. The government-related debt category can include nominal and inflation-linked Treasuries, so-called agency debt, interest-rate derivatives and bank debt backed by the Federal Deposit Insurance Corp.

Record Writedowns

Gross has been selling mortgage-backed securities over the past few months after loading up on them last summer in the midst of the financial crisis, which started with the collapse of the U.S. property market in 2007. The meltdown triggered $1.51 trillion of writedowns and credit losses at banks and sent the global economy into its first recession since World War II. U.S. unemployment increased to 9.5 percent in June, the most since 1983.

Pimco has forecast a “new normal” in the global economy that will include heightened government regulation, lower consumption and slower growth in the coming years. U.S. growth rates will slow to 2 percent or less over the next five years, according to the firm.

Mortgage-backed securities returned 3.1 percent this year, while Treasury bills rose 0.2 percent, according to indexes compiled by Merrill Lynch & Co. Treasury 10-year notes handed investors a 9.5 percent loss as signs of improvement in the economy cut demand for the relative safety of government debt.

Improved Risk Appetite

Demand for higher yields has increased in the past week as stocks rallied around the world.

“We’re getting improvement in risk appetite,” said Adam Donaldson, head of debt research in Sydney at Commonwealth Bank of Australia, the nation’s second-largest lender. “The immediate trend is that the equity market is looking very strong.”

The Standard & Poor’s 500 Index opened higher, gaining 0.5 percent. MSCI’s World Index of stocks rallied 6.6 percent last week, the most in four months.

The yen and dollar fell against higher-yielding currencies, reflecting reduced demand for the Japanese and U.S. currencies as a refuge. The yen dropped to 134.56 versus the euro as of 9:31 a.m. in New York from 132.85 on July 17. The dollar declined to $1.4233 per euro from $1.4102.

Gross kept his allocation to corporate debt unchanged at 18 percent of assets.

Cash Holdings

Cash comprised negative 6 percent, the most in 2009, rising from negative 14 percent. The fund can hold a so-called negative position by using derivatives, futures or by shorting.

Cash and equivalent assets can include commercial paper, Treasury bills, short-term mortgage-backed and company bonds, money market derivatives and other securities, according to a report posted on Pimco’s Web site.

Derivatives are financial obligations whose value is derived from an underlying asset such as debt, equities 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.

The Total Return Fund returned 10.9 percent in the past year, beating 97 percent of its peers, according to data compiled by Bloomberg. The one-month return is 1.2 percent, outpacing 45 percent of its competitors. Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Dakin Campbell in New York at dcampbell27@bloomberg.net.

Last Updated: July 20, 2009 09:39 EDT