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Gross Boosts Treasuries 1st Time in 4 Months as QE3 Looms

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

Bill Gross at Pacific Investment Management Co. boosted holdings of Treasuries for the first time in four months and kept mortgages near a three-year high, setting up the world’s biggest bond fund for potential gains from further monetary easing by the Federal Reserve.

Gross raised the proportion of U.S. government and Treasury debt in the $260 billion Total Return Fund to 35 percent in May, the first increase since January and up from 31 percent of its record asset holdings in April, Newport Beach, California-based Pimco said on its website yesterday. Holdings of mortgages dipped to 52 percent from 53 percent in April.

Pimco has been among investors positioning to benefit from a third round of debt purchases by the Fed. Investors should focus on the debt of nations such as the U.S. and Brazil and avoid Europe, Gross said this month.

“We would suggest at Pimco avoiding the entire euro zone until they can come up with some type of solution which involves the private sector,” Gross said in a radio interview on “Bloomberg Surveillance” with Tom Keene on June 1. “Until you bring them back then no solution is really going to be possible.”

The yield on the benchmark 10-year note fell to a record low of 1.44 percent on June 1. Treasuries handed investors a 1.8 percent return in May, the most since August 2011 according to indexes compiled by Bank of America Merrill Lynch. Mortgage securities gained 0.3 percent, a 17th-straight month of returns.

Spain asked for as much as 100 billion euros ($125 billion) over the weekend to save its banking system, making it the fourth member of the currency bloc to seek a rescue. The nation’s bonds fell yesterday along with those of Italy, Europe’s most indebted nation, which is scheduled to sell notes this week.

Mortgage Bets

A windfall from expanded purchases by the U.S. central bank would represent a repeat for the fund, which holds money ranging from individuals’ retirement accounts to institutional investments. Pimco’s Total Return Fund made home-loan bets before the Fed acquired $1.25 trillion of mortgage bonds between January 2009 and March 2010.

The Fed, which meets June 19-20, purchased $2.3 trillion of debt in two rounds of quantitative easing from December 2008 to June 2011 to boost the economy. The figure includes $1.4 trillion in mortgages and $900 billion of Treasury debt.

Fed Chairman Ben S. Bernanke said June 7 the central bank remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate. Bernanke told the Joint Economic Committee in Washington that the Fed has the tools that would provide more support to the economy by boosting accommodation.

Greater Odds

Economists at Morgan Stanley, Bank of America Corp. and JPMorgan Chase & Co. see greater odds for a third round of quantitative easing, or QE3. Morgan Stanley estimates the chances at 80 percent, up from 50 percent last month, and expects that the Fed would expand its mortgage-bond holdings by about $200 billion.

Mortgage holdings at the Total Return Fund reached a three-year high in April and in May were still more than double the 25 percent of the total represented last July, according to Bloomberg compilations of data released on Pimco's website.

A Fed study released yesterday showed that the median net worth of U.S. families sank 38.8 percent from 2007 to 2010 as house prices plummeted. That may add to the case for the central bank to target any new stimulus to supporting home values.

Negative Cash

Pimco raised emerging-market debt to 8 percent, from 7 percent, and investment-grade credit was unchanged at 13 percent, the smallest ratio since March 2008. High-yield credit was 2 percent of holdings in May, the least since 2009.

Gross changed the Total Return Fund’s net cash-and-equivalent position to negative 21 percent, from negative 18 percent. The fund can have a so-called negative position by using derivatives, futures or by shorting.

The fund’s holdings of the bonds of non-U.S. developed nations were unchanged at 6 percent the previous month.

The Total Return Fund gained 6 percent over the past year, beating 76 percent of its peers, according to data compiled by Bloomberg. The fund attracted $124 million in May, according to Morningstar Inc.

The fifth-straight month of net deposits followed the addition of $2.7 billion in April. Investors pulled about $3 billion from the fund in quarter ended Dec. 31, bringing withdrawals last year to about $5 billion, said Chicago-based Morningstar.

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