Bloomberg News

Gross Boosts Mortgage Holdings to Highest Since January

October 11, 2011

(Adds mortgage securities in the fifth paragraph.)

Oct. 11 (Bloomberg) -- Bill Gross increased holdings of mortgage bonds in his flagship fund to the highest level since January as the Federal Reserve announced plans to reinvest housing debt into the securities to drive borrowing rates lower.

The Pacific Investment Management Co. founder boosted housing bonds to 38 percent of assets in his $242 billion Total Return Fund in September, from 32 percent the prior month, according to data on Newport Beach, California-based Pimco’s website. Cash equivalents and money-market securities fell to negative 19 percent, from negative nine percent in August.

Yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home-loan rates tumbled the most in more than two years relative to Treasuries after the Fed announced the purchases on Sept. 21 as part of a plan that’s become known as Operation Twist. The Fed switched tactics after previously reinvesting into Treasuries the cash generated by its holdings of agency mortgage securities and debt.

“We like agency mortgages because the Fed is going to be buying them, because they yield 3 percent, plus or minus, as opposed to one half to 1 percent in the short-term portion of the Treasury curve,” Gross said during a Bloomberg Television interview Oct. 4. Pimco doesn’t comment directly on monthly asset changes in the world’s largest bond fund.

Yield Spread

Fannie Mae’s current-coupon 30-year fixed-rate mortgage securities fell about 0.16 percentage point to 1.06 percentage point more than 10-year U.S. government debt on Sept. 21, the largest drop since March 2009, according to data compiled by Bloomberg. That narrowing had followed the Fed’s decision to increase its initial buying of agency mortgage securities to $1.25 trillion from as much as $500 billion.

“You can pick up an agency guarantee with a yield that obviously isn’t what it used to be, but is much better than what the Treasury and the Fed in conjunction are offering these days,” Gross said during the interview with Lisa Murphy on “Street Smart.”

Holdings of Treasuries were unchanged at 16 percent last month. After eliminating Treasuries from his Total Return Fund in February because they were too expensive, Gross has steadily increased his holdings in U.S. government securities as the debt last quarter posted the highest returns in almost three years. Pimco favors the so-called safe sovereign debt of nations that have the ability to raise monetary stimulus as the risk of recession in developed nations increases, Gross said during a Bloomberg Radio interview Oct. 7.

Trailing Peers

The Total Return Fund returned 1 percent in the past year, trailing behind 83 percent of its peers, according to data compiled by Bloomberg. The one-month return is negative 2.83 percent, outpacing 2 percent of its competitors.

The fund can have a so-called negative position in a sector by using derivatives, futures or by shorting.

The global economy risks lapsing into recession with the pace of growth falling below the “new normal” level the firm has predicted since 2009, Gross said in a monthly outlook posted on Pimco’s website Oct. 3. Pimco predicted after the 2008 market collapse that the U.S. economy would grow at a below-average pace for several years as unemployment stayed elevated and the “heavy hand of government” would be evident in markets.

“Sovereign balance sheets resemble an overweight diabetic on the verge of a heart attack,” Gross wrote in the outlook. “If global policy makers could focus on structural as opposed to cyclical financial solutions, new normal growth as opposed to recession might be possible.”

Treasuries returned 8.2 percent this year, according to Bank of America Merrill Lynch’s U.S. Treasury Master Index.

Pimco is a unit of Munich-based insurer Allianz SE. The firm managed $1.34 trillion in assets as of June.

--Editors: Dave Liedtka, Greg Storey

To contact the reporter on this story: Susanne Walker in New York at

To contact the editor responsible for this story: Dave Liedtka at

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