Bill Gross, who runs the world's biggest bond fund at Pacific Investment Management Co., cut holdings of government debt and boosted cash to the most since Lehman Brothers Holdings Inc. collapsed in September 2008.
Gross increased cash in the $199.4 billion Total Return Fund's to 7 percent in November from negative 7 percent in October, according to Pimco's Web site. The fund can have a so-called negative position by using derivatives, futures or by shorting. He reduced government-related securities to 51 percent from a five-year high of 63 percent in October.
Pimco is selling government debt as economists say U.S. gross domestic product will grow enough in 2010 to lead the Federal Reserve to raise interest rates. The Fed will increase its target for overnight loans between banks to 0.75 percent in a year, versus the current rage of zero to 0.25 percent, a Bloomberg survey of banks and securities companies shows.
"Yields will rise next year," said Tsutomu Komiya, an investment manager in Tokyo at Daiwa Asset Management Co., which oversees the equivalent of $77 billion. "The U.S. economy will recover and there is a possibility of a rate hike."
Treasuries OvervaluedGross told CNBC on Dec. 7 that Treasuries are overvalued compared to potential inflation. Mark Porterfield, a spokesman at Pimco's main office in Newport Beach, California, has said the company doesn't comment on fund holdings.
Ten-year Treasury yields were little changed today at 3.47 percent as of 10:50 a.m. in Tokyo, according to data compiled by Bloomberg. They have risen from a record low of 2.04 percent set a year ago.
The rate will climb to 4.04 percent at the end of 2010, according to a Bloomberg survey with the most recent forecasts given the heaviest weightings.
Treasuries have handed investors a 1.1 percent loss in December, heading for their worst month since April, according to indexes compiled by Bank of America's Merrill Lynch unit.
Gross also cut holdings of mortgage securities to 12 percent, the lowest since Pimco's figures started in 2000, from 16 percent, according to the Web site.
Fed officials on Dec. 16 said the economy is strengthening and left its target rate unchanged at the conclusion of its two-day policy meeting.
Growth QuickensThe FOMC met after a week of reports suggesting economic growth picked up in the fourth quarter. Retail sales climbed 1.3 percent in November, twice as much as anticipated in a Bloomberg News survey of economists. Inventories rose in October for the first time since August 2008, and exports in the same month increased to the highest levels in 11 months.
Gross said last month the central bank is unlikely to raise interest rates until nominal gross domestic product increases by 4 percent to 5 percent for another 12 months.
GDP grew at a 2.8 percent annual pace in the third quarter, the Commerce Department said on Nov. 24. While the U.S. has returned to growth after the deepest recession since the 1930s, most economists surveyed by Bloomberg News predict the unemployment rate will exceed 10 percent through June. Consumer spending is still below its level of two years ago.
Jobless Rate FallsThe unemployment rate fell to 10 percent in November from a 26-year high of 10.2 percent the previous month, the Labor Department said on Dec. 4. The U.S. lost 11,000 jobs, compared with a prediction of 125,000 job cuts in a survey of economists by Bloomberg News.
Pimco's government-related debt category may include conventional and inflation-linked Treasuries, agency debt, interest-rate derivatives and bank debt backed by the Federal Deposit Insurance Corp., according to Pimco's Web site.
Cash and equivalent securities can include commercial paper, short-term government and mortgage-backed securities, short-maturity company bonds and money market derivatives, according to the site.
The Total Return Fund gained almost 17 percent in the past year, beating 55 percent of its peers, according to data compiled by Bloomberg. The one-month return is 0.1 percent, outpacing 51 percent of its competitors. Pimco is a unit of Munich-based insurer Allianz SE.
Derivatives are financial obligations whose value is derived from an underlying asset such as debt, stocks 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.