July 20 (Bloomberg) -- Pacific Investment Management Co., manager of the world’s largest bond fund, said it will buy five- to 10-year Treasury securities, reversing a policy to steer clear of U.S. debt.

“With Treasury yields near the top of our expected range, Pimco plans to overweight duration and take exposure to the five- to 10-year portion of the yield curve,” Pimco said today in a report on its Web site.

The strategy may be a change for the Newport Beach, California-based firm, which has avoided Treasuries in recent months. Bill Gross, manager of Pimco’s Total Return Fund, the world’s largest, has said before today that he has no interest in buying Treasuries.

Gross held about $4 billion in Treasuries in the $161 billion Total Return Fund at the end of March, or about 2.8 percent of the then $150 billion total, Mark Porterfield, a Pimco spokesman, said in an e-mail April 13.

The 10-year note’s yield fell four basis points, or 0.04 percentage point, to 3.61 percent at 4:35 p.m. in New York, according to BGCantor Market Data. It earlier touched 3.72 percent, the highest level since June 23. The price of the 3.125 percent security maturing in May 2019 rose 10/32, or $3.13 per $1,000 face amount, to 96.

Peso, Real

Pimco also said it may buy the Mexican peso and Brazilian real as the U.S. dollar slumps and growth in emerging economies outpaces that of developed nations.

Investors should buy emerging-market currencies to protect themselves against the risk that U.S. policy makers will allow the dollar to slide should they lack the skill to “drain the system of emergency liquidity at the appropriate time,” Pimco said.

“In light of an expected long-run erosion in the value of the U.S. dollar, Pimco will look to take positions in select emerging market currencies that we believe have the most compelling appreciation potential,” Pimco said in the report. “For now, these include primarily the currencies of Brazil and Mexico.”

Pimco is betting that over the next three to five years emerging economies will grow faster than developed countries. Brazil and Mexico will expand 3.4 percent and 4.7 percent, respectively, on average over the next five years, according to the International Monetary Fund. The U.S. economy will grow 2.7 percent over the same period, according to the IMF.

Best Performer

Brazil’s real has surged 21.9 percent this year, the best performance among the world’s major currencies. The yield on Brazil’s local-currency zero coupon notes maturing in January 2010 has fallen 3.51 percentage points to 8.71 percent in the year to July 17, according to Banco Votorantim.

Mexico’s peso is up 2.8 percent so far this year, lagging gains in most Latin American currencies, on concern the nation’s dependence on the U.S. will cause the recession to last longer than in other countries in the region. The yield on Mexico’s 10 percent peso bond due December 2024 has risen 10 basis points, or 0.1 percentage point, to 8.36 percent this year, according to Banco Santander SA.

“When you look at Mexico and compare it to other countries it doesn’t look that bad,” said Guillermo Osses, who helps oversee about $47 billion in emerging-market assets at Pimco.

The Mexican government is forecasting the economy will shrink 6.2 percent this year, the worst contraction since the peso crisis in 1995, as the U.S. recession curbs exports and the outbreak of swine flu deepened a slowdown in tourism in the first half of the year. The country’s budget deficit will grow to 3 percent of gross domestic product this year from 2.1 percent in 2008, according to the finance ministry.

“Many other emerging market countries with contractions like the one in Mexico would have had much poorer fiscal numbers,” Osses said.

To contact the reporters on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net; Valerie Rota in Mexico City at vrota1@bloomberg.net.

Last Updated: July 20, 2009 17:27 EDT