Pimco Adjusts Holdings to Show Gross’s Fund Owns U.S. Debt

Pimco Co-Chief Investment Officer Bill Gross
Bill Gross, co-chief investment officer of Pacific Investment Management Co. Photographer: Tim Boyle/Bloomberg

Pacific Investment Management Co., under criticism for missing this year’s rally in Treasuries, revised how it lists asset holdings to show that its flagship fund held U.S. government debt in May.

The $243 billion Total Return Fund managed by Bill Gross increased its holdings of U.S. government debt to 5 percent from 4 percent in April, according to data on the Newport Beach, California-based company’s website. In the prior month’s posting, the category that was classified as government and government-related debt had shown negative holdings of 4 percent. The website showed an added category this month of swaps and liquid rates with holdings of minus 9 percent. Michael Reid, a spokesman at Pimco, declined to comment.

Gross, the billionaire founder and co-chief investment officer of Pimco, has said for months that Treasuries are unattractive because yields don’t offer enough compensation for the risk of inflation and U.S. policies will hurt investors. After topping 98 percent of competitors the last five years, the fund beat just 33 percent in the past month as Treasuries gained 1.4 percent, according to data compiled by Bloomberg.

“I certainly don’t have any regrets.” Gross said of his current strategy in an interview yesterday in Chicago. “We’re beating the market by 50 basis points. We’re not completely satisfied, but it’s not the negative headline that one sees.”

‘Swap, Liquid Rates’

The new government-Treasury category includes holdings of U.S. Treasury notes, bonds, futures and inflation-protected securities, according to Pimco. The swaps and liquid rates sector includes U.S. dollar-denominated interest rates swaps, swaptions, options, and other derivatives. A negative number in the swaps and liquid rates category indicates a negative duration position in U.S. interest rates achieved by swaps or other interest-rate derivatives, Pimco said in an email.

Pimco also moved agency securities held by the Total Return Fund into a separate category called government-agency, which includes holdings of U.S. agencies, as well as FDIC-guaranteed, government-guaranteed corporate securities, and so-called supernationals.

Pimco’s U.S. government-related debt category previously included nominal and inflation-linked Treasuries, agency debt, interest-rate derivatives, Treasury futures and options and bank debt backed by the Federal Deposit Insurance Corp., according to the firm.

“He’s able to say I’m not short governments; I’m not short Treasuries, which is true, but doesn’t diminish the fact that the overall rate view is negative,” said Edward Lashinski, senior strategist in Chicago at ABN Amro Clearing LLC.

Negative Position

Treasuries are considered the safest and most liquid, investments in the world. The U.S. is the world’s biggest debt issuer. It has $14.2 trillion of debt outstanding, while marketable Treasuries total $9.7 trillion. Central banks and other overseas investors own $4.48 trillion, or 46 percent of marketable debt.

The negative position reflected trades that would profit from a decline in Treasuries. Cash and equivalents, the largest component of the Total Return Fund, rose to 37 percent from 35 percent in April, under the revised categories.

Gross has been betting against U.S. debt through short sales, in which the Total Return Fund would borrow and then sell government bonds, hoping to profit by repurchasing the securities at a lower price in the future. The fund’s annual report showed that, as of March 31, it had sold short about $2.2 billion of Treasuries that mature in about 10 years and $5.8 billion of agency debt that comes due in 2041.

Rate Swaps

In addition, the fund also entered into 10- and 30-year interest-rate swaps with a face value of about $15.2 billion during the fourth quarter of 2010 and first quarter of 2011, according to filings. Based on the terms disclosed in Pimco Total Return’s annual report, the 10-year and 30-year swaps held by the fund have lost about $1 billion in market value since March 31, according to Bloomberg calculations.

In order to obtain the contracts, which are the equivalent of betting against Treasuries, the Total Return Fund paid upfront premiums totaling about $331 million to 12 Wall Street banks, the filing shows.

While the swaps are costly for the fund, given that it must pay out more than it takes in under the contracts, Gross would reap profits from the trades should long-term rates rise, causing Treasuries to tumble. Conversely, a decline in long-term rates would punish the fund’s returns.

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