Bill Gross has increased holdings of mortgage bonds in Pimco's flagship fund to the highest level since January in light of the
Federal Reserve Board's announcement of plans to reinvest housing debt into the securities to drive borrowing rates lower.
The co-chief investment officer of Pacific Investment Management Co. LLC boosted housing bonds to 38% of the assets in his $242 billion Total Return Fund Ticker:(PTTAX), from 32% the prior month, according to data on Pimco's website. Cash equivalents and money market securities fell to -19%, from -9% in August.
The fund can have a so-called negative position in a sector by using derivatives, futures or by shorting.
Yields on
Fannie Mae and
Freddie Mac mortgage securities, which guide U.S. home loan rates, tumbled the most in more than two years, relative to Treasuries, after the Fed announced the purchases Sept. 21 as part of a plan that has become known as Operation Twist. The Fed switched tactics after previously reinvesting in Treasuries cash generated by its holdings of agency mortgage securities and debt.
YIELD OUTSTRIPS TREASURIES
“We like agency mortgages because the Fed is going to be buying them, because they yield 3%, plus or minus, as opposed to one-half to 1% in the short-term portion of the Treasury curve,” Mr. 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.
Fannie Mae's current coupon on 30-year fixed-rate mortgage securities fell about 0.16 percentage points to 1.06 percentage points more than 10-year U.S. government debt Sept. 21, the largest drop since March 2009, according to data compiled by Bloomberg. That narrowing 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,” Mr. Gross said during the interview.
Holdings of Treasuries in the Total Return Fund were unchanged at 16% last month.
After eliminating Treasuries from the fund in February because they were too expensive, Mr. Gross has steadily increased his holdings in U.S. government securities. 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 a
recession in developed nations increases, he said during a Bloomberg Radio interview Oct. 7.
TRAILING PEERS
The Total Return Fund gained 0.97% year-to-date through last Wednesday, trailing 92% of its peers, according to Morningstar Inc. It's return for the one-month period ended Oct. 12 was -2.47%, trailing 92% of its peers.
The global economy risks lapsing into recession, with the pace of growth falling below the “new normal” level the firm has predicted since 2009, Mr. Gross wrote 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, with unemployment remaining elevated and the “heavy hand of government” evident in markets.
“Sovereign balance sheets resemble an overweight diabetic on the verge of a heart attack,” Mr. 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 have returned about 8.2% this year, according to
Bank of America Merrill Lynch's U.S. Treasury Master Index.
Pimco managed $1.34 trillion in assets as of June.
