Gross Cuts Treasuries Holdings While Warning of Reflation

Bill Gross, who runs the world’s biggest bond fund, reduced his holdings of U.S. Treasuries to the lowest since October while warning that more stimulus from the Federal Reserve will lead to a resurgence of inflation.

Gross cut the proportion of U.S. government and Treasury debt in Pacific Investment Management Co.’s $272 billion Total Return Fund (PTTRX) to 21 percent of assets in August, from 33 percent the previous month, according to a report on the Newport Beach, California-based company’s website today. Mortgages assets were cut to 50 percent from 51 percent. Pimco doesn’t comment directly on monthly changes in portfolio holdings.

“QEs lower real interest rates and raise nominal rates because their intent is to reflate,” Gross wrote in a Twitter post earlier today, referencing the two rounds of bond purchases conducted by the Fed since 2008 to keep borrowing rates low that have become known as quantitative easing, or QE.

Almost two-thirds of economists in a Bloomberg survey projected the U.S. central bank will announce a third round of quantitative-easing tomorrow, while also extending into 2015 its pledge to keep interest rates at virtually zero.

Policy makers will probably announce an open-ended plan tied to a sustained improvement in the economy rather than specify an amount of purchases and an end-date, according to 32 of the 73 economists in the survey. Twenty-two expected a fixed duration and amount.

Inflation Expectations

The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of traders’ outlook for consumer prices, reached 2.41 percentage points, the widest since March 21. The average over the past decade is 2.16 percentage points.

Pimco’s founder and co-chief investment officer said Sept. 7 that investors should try to take advantage of central bank policies and not fight the Fed or European Central Bank, which has endorsed buying one- to three-year sovereign debt of nations such as Spain to keep borrowing costs low.

“Look at it as a surfer would, you want to get on top of that wave and you want to ride it as long as possible and take the force of that wave,” Gross said in a radio interview last week on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “You sell volatility via mortgages, you sell volatility by capturing the roll down from five to four to three years because things simply don’t change.”

Industry Comparisons

The Total Return Fund gained 8.3 percent over the past year, beating 94 percent of its peers, according to data compiled by Bloomberg. In the past month, it has returned 0.65 percent, outpacing 87 percent of similar funds.

The fund’s government and Treasury debt category includes fund holdings of U.S. Treasury notes, bonds, futures and inflation-protected securities.

Pimco kept emerging-market debt steady at 8 percent in August, and cut investment-grade credit to 12 percent from 13 percent, the least since March 2008. High-yield credit was 2 percent of holdings in August, the same as the previous month.

Gross changed the Total Return Fund’s net cash-and- equivalent position to negative 6 percent, from negative 18 percent the previous month. The fund can have a so-called negative position by using derivatives, futures or by shorting.

Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.82 trillion of assets as of June 30.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net;

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.