Bill Gross Has Significantly Boosted His Bet On US Treasuries

Bill Gross

NEW YORK, May 9 (Reuters) – PIMCO Total Return Fund, the world’s largest bond fund, increased its U.S. Treasuries holdings to the highest in over a year in April, data from the firm’s website showed on Thursday.

The fund, which has roughly $292.9 billion in assets and is run by Bill Gross, increased its holdings of U.S. Treasury securities to 39 per cent in April, up from 33 per cent in March.

Treasuries “are better than the alternative (cash) as long as central banks and dollar reserve countries (China, Japan) continue to participate,” Gross said in his May investment letter to clients.

Gross, a founder and co-chief investment officer of PIMCO, said in the letter entitled “There Will Be Haircuts,” that while Treasuries are a better alternative than cash, they still face a loss of at least 2 percentage points in the interest payouts after accounting for inflation.

Pacific Investment Management Co., a unit of European financial services company Allianz SE, had $2.04 trillion in assets under management at the end of March, according to the firm’s website.

Gross, who has criticised the efficacy of global monetary stimulus in past letters, cited the U.S. Federal Reserve’s zero-interest rate policy and monthly bond purchases of $85 billion as a cause of the reduction on Treasury returns.

The Fed has pledged to keep interest rates between zero and 0.25 per cent at least until unemployment hits 6.5 per cent, and provided inflation stays under 2.5 per cent.

The fund also showed an increase in mortgage holdings, to 34 per cent in April from 33 per cent, but decreased its holdings of investment-grade credit to 7 per cent in April from 9 per cent.

The PIMCO Total Return Fund attracted inflows of about $516 million in April, down from inflows of $723.4 million in March, according to Morningstar.

The fund, which is the flagship of Newport Beach, California-based PIMCO, slightly increased its holdings of emerging market securities to 8 per cent in April from 7 per cent in March. The fund also showed a decrease in its holdings of debt issued in developed markets outside the United States, to 10 per cent from 11 per cent in March.

Some investors have warned that high prices and low interest rates on bonds, mainly in response to the Fed’s monthly bond purchases, have led to much greater risk of losses in bonds. Still, major bond firms such as PIMCO and Loomis Sayles have continued to see inflows to their main bond funds.

PIMCO said on its website that the fund’s holdings of U.S. Treasury debt includes Treasury notes, bonds, futures and inflation-protected securities.

The PIMCO Total Return Fund’s move into Treasury securities comes as the fund’s cash equivalents and money-market securities fell to negative 8 per cent in April, from negative 3 per cent in March.

In having a so-called negative position in cash equivalents and money-market securities, it is an indication of using derivatives and short-term securities as collateral to boost the fund’s buying power with leverage.

The fund’s holdings of high-yield “junk” bonds, municipal debt, government-guaranteed agency securities, U.S. dollar-denominated interest rate swaps and rate-related derivatives, and “other” forms of credit were unchanged in April.

High-yield “junk” bond holdings remained at 3 per cent, municipal debt at 5 per cent, government-guaranteed agency securities at 4 per cent, swaps and rate-related derivatives at negative 3 per cent and “other” forms of credit at 1 per cent of the fund’s portfolio.

Copyright (2013) Thomson Reuters. Click for restrictions

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