Gross Cuts Treasuries, Raises Mortgages in Fed Buy Bet

Pimco Total Return Fund's Bill Gross
Bill Gross, co-chief investment officer of Pacific Investment Management Co. (PIMCO), speaks during an alumni event hosted by UCLA Anderson School of Management in Beverly Hills on Nov. 17, 2011. Photographer: Andrew Harrer/Bloomberg

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., cut holdings of Treasuries last month to 32 percent, the lowest since December, and raised mortgages to the most since 2009.

Gross reduced the proportion of U.S. government and Treasury debt in the $252.4 billion Total Return Fund in March from 37 percent of assets in February, according to a report on the company’s website today.

He raised the fund’s holdings of mortgages to 53 percent last month, the highest since June 2009, from 52 percent in February, in a bet that the Federal Reserve will buy the securities in a new round of purchases. Newport Beach, California-based Pimco doesn’t comment directly on monthly changes in its portfolio holdings.

The Fed will probably shift focus to buying mortgage securities to keep borrowing rates low when its so-called Operation Twist program ends in June, Gross said in a March 28 interview on Bloomberg Television’s “InBusiness with Margaret Brennan.”

What the Fed will “try to do is twist in the mortgage market; basically buy current-coupon mortgages in agency space, 3 percent and 3.5 percent coupons,” he said. “And basically twist by repoing out the Treasuries they currently own in short-term space.”

Treasuries Position

Gross cut the proportion of U.S. government securities in the fund in February for the first time since eliminating the securities from his portfolio in February 2011. He held a net bet against the securities in the Total Return Fund last year when he missed the biggest rally in Treasuries since 2008.

Gross issued a “mea culpa” to investors in October and boosted the debt by January to 38 percent, the highest since July 2010.

Gross’s fund has returned 6.5 percent in the past year, beating 44 percent of its peers, according to data compiled by Bloomberg. It gained 0.6 percent during the past month, better than 93 percent of competitors.

Treasuries lost investors 1.3 percent in the first quarter, after returning 9.8 percent in 2011, according to Bank of America Merrill Lynch’s Index.

The fund kept emerging-market debt at 10 percent last month, and cut the bonds of non-U.S. developed nations to 6 percent from 7 percent in February.

Gross raised the Total Return Fund’s net cash-and-equivalent position to negative 23 percent from negative 31 percent. The fund can have a so-called negative position by using derivatives, futures or by shorting.

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

Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.36 trillion of assets as of Dec. 31.

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