Pimco’s Gross Cuts U.S. Government Debt as Treasuries Dropped

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., decreased its holdings of Treasuries in March as comments by Federal Reserve Chair Janet Yellen sent shorter-term U.S. securities tumbling.

The proportion of U.S. government-related debt in the $232 billion Total Return Fund (PTTRX) was cut to 41 percent, the company’s website showed yesterday, from 43 percent in February. Mortgage-bond holdings were reduced to 23 percent, the lowest level since June 2011, from 29 percent in February. The fund lost 0.6 percent last month, according to data compiled by Bloomberg.

“The 1–5 year portion of the curve, beaten up recently due to Fed ‘blue dot’ forecasts and Yellen’s ‘six months after’ comments, should hold current levels if inflation stays low,” Gross wrote in his monthly investment commentary on Newport Beach, California-based Pimco’s website on April 3. “But 5–30 year maturities are at risk.”

Treasury two-year note yields surged the most since 2011 on March 19 after Yellen signaled that an interest-rate increase might come six months after the central bank concludes its bond-buying stimulus, which is forecast for the fall, and Fed officials increased projections for the benchmark interest rate.

The Total Return Fund’s U.S. government-related category includes holdings of U.S. Treasury notes, bonds, agency debt, interest-rate swaps and inflation-protected securities.

U.S. Credit

Pimco increased its holdings in the U.S. credit category, which includes investment-grade and high-yield securities, to 10 percent, compared with 9 percent the previous month. Holdings of money-market debt and cash-equivalent securities were raised to 5 percent, from zero in February.

Gross kept the Total Return Fund’s holdings of emerging-market bonds last month to 6 percent. He increased non-U.S. developed debt to 10 percent, from 9 percent, the website data show.

Pimco, a unit of the Munich-based insurer Allianz SE, doesn’t comment directly on monthly changes in holdings or specific types of securities within a market sector.

The Total Return Fund suffered its 11th straight month of withdrawals in March as clients withdrew an estimated $3.1 billion, according to an April 1 e-mail from Morningstar Inc.

The Pimco fund has gained 1.63 percent this year through March 31, lagging behind 72 percent of its peers. Last year it lost investors 1.9 percent, the most since 1994, trailing 65 percent of peers. It lost the title of world’s largest mutual fund in October to the Vanguard Total Stock Market Index Fund. (VTSMX)

Fed Outlook

The Fed in March ordered a $10 billion cut in its monthly bond-buying for a third straight meeting, lowering it to $55 billion. Policy makers probably will conclude the program in October, economists said in a Bloomberg News survey last month.

Yellen told reporters after the meeting an increase in the key interest-rate target, the fed funds rate, could come “around six months” later. The Fed has held the rate at zero to 0.25 percent since 2008 to support the economy.

Fed officials increased their projections for the rate last month. The median estimate was for it to be 1 percent in December 2015 and 2.25 percent a year later. That compared with estimates in December of 0.75 percent and 1.75 percent respectively, according to officials’ summary of economic projections, which are represented by blue dots.

“Probabilities suggest that as the Fed completes its taper, the 5-30 year bonds that it has been buying will have to be sold a higher yields to entice the private sector back in,” Gross wrote in his investment commentary.

Shorter-term Treasury yields fell last week as bets cooled that the Fed might accelerate its unwind of stimulus after data showed U.S. employers added fewer jobs than forecast in March. Yellen said March 31 the central bank’s accommodative policies will be needed for “some time” because of labor-market slack.

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

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Greg Storey, Paul Cox

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