Bloomberg News

Gross Boosts Holdings of Treasuries to Highest Since 2010

September 12, 2011

(Adds fund performance starting in the third paragraph.)

Sept. 12 (Bloomberg) -- Bill Gross, who runs the world’s biggest bond mutual fund at Pacific Investment Management Co., increased his holdings of Treasuries to the highest level since December 2010 after underperforming a majority of his peers.

The $245 billion Total Return Fund raised government and Treasury debt to 16 percent of assets last month from 10 percent in July, according to data posted on the Newport Beach, California-based company’s website today. Mortgage holdings climbed to 32 percent from 25 percent. Cash equivalents and money-market securities dropped to negative 9 percent from 15 percent, the lowest level since November 2010.

Gross had been reducing the fund’s vulnerability to interest-rate swings and increasing its reliance on credit quality since July 2010 by shifting from Treasuries to corporate and non-U.S. sovereign debt, a strategy that backfired last month. As the U.S. economy slowed and Europe’s debt crisis worsened, investors sought the safety of Treasuries and sold the bonds Pimco had bet on, leaving the fund trailing 89 percent of competitors in August and 67 percent this year through Sept. 8, according to data compiled by Bloomberg.

Treasuries have returned 8.5 percent in 2011 in what would be their best year since the depths of the financial crisis in 2008, according to Bank of America Merrill Lynch indexes. A rally in Treasuries today pushed the 10-year Treasury note yield down to a record 1.877 percent. The yield on the 10-year Treasury note has dropped 189 basis points since its 2011 high of 3.766 percent in February.

Credit Risk

Gross has been adding to his holdings of Treasuries since April after eliminating them from the fund’s portfolio in February. The fund is now having its worst year versus rivals based on records going back to 1995.

Gross bet almost $11 billion in the second quarter on an index of U.S. corporate credit risk, raised the amount of insurance the fund provides on sovereign debt and put $1.3 billion into Italian Treasury bonds linked to inflation, according to an August regulatory filing.

The Total Return Fund has returned 3.97 percent in the past year, beating 32 percent of its peers, according to data compiled by Bloomberg. It’s down 0.1 percent over the past month, beating 19 percent of its competitors. The firm managed $1.34 trillion in assets as of June.

The global economic crisis is leading to a possible “developed economy” recession in the U.S. and Europe, which may be hard to alleviate, Gross said in an investment note on Aug. 30. Investors should look to Australia, Mexico, Brazil and Canada, along with non-dollar currencies that have strong ties to the Asian continent, he wrote.

--With assistance from Miles Weiss in Washington and Sree Vidya Bhaktavatsalam in Boston. Editors: Dave Liedtka, Paul Cox

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

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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