Gross ‘Cautious’ on Munis as Tax-Benefit Debate Looms

(Corrects name of TV program in second paragraph.)

Bill Gross, manager of the world’s biggest bond fund, said he’s taking a “cautious” approach to state and local debt on the view that Congress may change the tax-exempt status of the securities.

Gross, who oversees the $285 billion Total Return Fund at Pacific Investment Management Co., has directed 5 percent of the fund to munis for three straight months, the longest stretch where the level has been that high since at least 2006. The Newport Beach, California-based fund manager may not increase that allocation because lawmakers might limit or change the tax- benefit that munis offer, Gross said today on Bloomberg Television’s “Market Makers.”

“We’re holding on to our positions, but muni rates are in this cloud of ‘will they or won’t they’ be taxed in terms of withholdings,” Gross said. “So we’ll take a cautious stance.”

President Barack Obama has proposed limiting the value of the muni tax break for higher earners to 28 percent. The proposal is part of a strategy to help reduce the federal deficit.

Gross, 68, more than doubled his holdings of municipal debt sold in New York to a $3 billion market value in the quarter ending Sept. 30, from $1.4 billion as of June 30, according to a semiannual filing the firm released last month. It was the biggest increase by amount among U.S. states.

Gross said he doesn’t plan to continue that strategy.

“Congress at this point can do lots of things that are surprising, so we’ll be relatively cautious on munis,” he said. “We won’t be selling them. But loading up on more New York munis? Probably not.”

The Total Return Fund earned about 10.4 percent last year, beating 95 percent of its peers, data compiled by Bloomberg show. It has gained an average of 8.03 percent annually over the past five years.

To contact the reporters on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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