Bill Gross has more than doubled his holdings of municipal debt sold in New York, helping propel the world's largest bond fund to its biggest investment in local securities in six years.
The $285 billion Total Return Fund, which Gross runs at Pacific Investment Management Co., boosted its New York state allocation to about a $3 billion market value in the quarter ending Sept. 30, from $1.4 billion as of June 30, according to a semiannual filing the firm released this month. It was the largest increase by amount among U.S. states.
Gross, 68, has been buying more New York debt as municipal sales in the state are set to outpace California's for the second straight year, data compiled by Bloomberg show. Issuance may get a further boost as New York borrowers such as the Metropolitan Transportation Authority finance rebuilding after Hurricane Sandy.
Wall Street's home state offered “a combination of good credits, prices we liked and the fact that they were a very high percentage of what was coming into the market when we really liked the market,” said Joe Deane, head of muni investments at Pimco in New York. The firm oversees $66 billion of local debt.
Gross hasn't been alone adding tax-exempts, which he recommended after the Nov. 6 presidential election on the view that income taxes are set to rise. Benchmark muni yields touched a 47-year low this month. In his December Investment Insight on Pimco's website, Gross included “high-quality” munis on his list of picks.
The fund manager, who's based in Newport Beach, California, was unavailable to comment, Mark Porterfield, a Pimco spokesman, said in an e-mail.
New York and its localities have sold $44.5 billion of long-term, fixed-rate debt this year, Bloomberg data show. The tally surpasses the $41 billion sold by California and its municipalities, typically the biggest borrowers in the $3.7 trillion muni market.
It would be unprecedented for New York issuers to outsell California's for two straight years, according to Citigroup Inc. data starting in 1991. In that span, California issuers were the market's top sellers in every year but 1998 until Governor Jerry Brown, facing budget deficits, slowed general-obligation sales since last year.
Issuers of the most-populous state still account for the largest muni allocation in the Total Return Fund, at $5.2 billion as of Sept. 30, from $4.4 billion the prior quarter.
New York debt has earned 6.1 percent this year, less than the 6.7 percent gain for the broader muni market and 8 percent for California, according to Barclays Plc data.
Investors are also drawn to New York because its pension system is one of the nation's healthiest, said Pimco's Deane. It had about 94 percent of the assets needed to meet promises to current and future retirees in 2011, compared with the median of 72 percent among states, Bloomberg Rankings data show.
Retirement obligations are “probably the single biggest difference in this industry from where we were 10 years ago,” Deane said.
Gross bought debt issued last quarter by the Port Authority of New York and New Jersey, which oversees redevelopment of the World Trade Center. The agency sold $2 billion of taxable bonds in September. He has also added obligations of the Triborough Bridge & Tunnel Authority, which sold $1.2 billion of tax exempts in August.
The Total Return Fund has earned 10.2 percent this year, beating 94 percent of its peers, according to data compiled by Bloomberg. In 2011, its 4.2 percent return outperformed only 30 percent of rivals. On a five-year basis, he has beaten 96 percent of his peers.
Sandy struck Oct. 29, destroying or damaging 305,000 homes and 265,000 businesses in New York. President Barack Obama this month asked Congress for $60.4 billion to reimburse northeastern states for infrastructure repairs and personnel expenses, which Congress has yet to act on. The MTA, operator of the biggest U.S. transit system, may borrow as much as $4.8 billion though short-term notes next year to rebuild infrastructure.
Gross has directed 5 percent of his fund to local debt for three straight months, the longest stretch where muni borrowings have been that high a percentage since at least 2006.
In trading yesterday, yields on benchmark 10-year munis fell to 1.76 percent, the lowest since Dec. 18, according to a Bloomberg Valuation index.