Bill Gross, who has been telling investors to favor short-term Treasuries, is following through on his own advice as longer-maturity bonds suffer their biggest losses in four years.
Mr. Gross cut the duration of holdings in the $250 billion Pimco Total Return Fund (PTTAX), the world's biggest bond fund, to 4.42 years as of Sept. 30 from 5.06 years a month earlier, according to a report Wednesday on Pacific Investment Management Co. LLC's website. Bonds due in one to five years made up 70% of the fund's holdings, the company reported.
Short-term Treasuries have changed little in 2013 on speculation the Federal Reserve under Janet Yellen will keep interest rates at a record low to spur the economy. Longer-term securities have plunged as investors push forward forecasts for when the Fed will raise its overnight benchmark, while betting the policy will spur inflation. President Barack Obama on Wednesday nominated Ms. Yellen, Fed vice chairman, to succeed Chairman Ben S. Bernanke when his term ends on Jan. 31.
“It's front-end friendly,” Mr. Gross said in an interview with Bloomberg, referring to the shorter-term securities among the spectrum of Treasury maturities. “Anything that is anchored to the policy rate — and the policy rate being something that probably is going to be 25 basis points for at least the next several years — anything that's anchored to that will do well and had done well.”
Treasuries due in a decade and longer have tumbled 10% in 2013, the first loss since 2009, according to a Bank of America Merrill Lynch index. Two-year notes gained 0.1%, the data show.
“Perhaps 10- and 30-year Treasuries, which are subject to inflation and reflation, which is basically what this policy of Janet Yellen's is going to attempt to do, those particular maturities are probably negatively affected,” Mr. Gross said. Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.97 trillion as of June 30.
Investors see a 30% chance that policymakers will increase the key interest rate target to 0.5% or more by January 2015, based on data compiled Wednesday by Bloomberg from futures contracts. The odds declined from 64% a month earlier. The Fed has kept the rate at zero to 0.25% since 2008.
The difference between yields on 10-year notes and similar-maturity Treasury inflation-protected securities, a gauge of expectations for consumer prices over the life of the debt, was at 2.22 percentage points. Annual consumer-price inflation was 1.5% in August.
Mr. Gross, the co-chief investment officer at Pimco, also recommended short-term Treasuries in his monthly investment outlook report Sept. 5.
Duration, which can be controlled by adjusting the maturity of debt holdings, measures sensitivity to changes in bond yields. A shorter duration is a more bearish position, because it will provide protection if yields rise.
Treasury Secretary Jacob J. Lew has said that the U.S. might not be able to make its debt payments starting Oct. 17 unless lawmakers and President Obama agree to raise the federal borrowing limit, sending some bill yields higher.
“We have avoided maturities in the time period toward the end of October,” said Nancy Prior, the president of money markets at Fidelity Investments. Fidelity is the largest manager of U.S. money funds with $427 billion in assets as of Aug. 31, according to Crane Data LLC.
As Fidelity has sought to avoid Treasury bills maturing near the deadline, Pimco has been buying as their yields have risen, according to Mr. Gross.
“Their selling begets opportunistic buying on the part of Pimco,” he said Wednesday on Bloomberg Television. “We're picking up pennies on the street. This is a particular penny that we think is risk-free.”
Mr. Gross kept holdings of Treasuries and other U.S. government-related debt unchanged at 35% of assets in September, the report on the Pimco website showed. Mortgage securities declined to 35% from 36%.
Over the past five years, the Total Return Fund has returned 7.88% annually on average, outperforming 84% of competitors, according to data compiled by Bloomberg. It lost investors 1.84% this year, outperforming just 44% of its peers, the data show.