PIMCO flagship fund cut mortgages, Treasuries ahead of Fed call

NEW YORK Wed Dec 12, 2012 2:30pm EST

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NEW YORK (Reuters) - The PIMCO Total Return Fund, the world's largest bond fund, reduced its exposure to mortgage bonds and Treasuries in November after profiting as a result of the Federal Reserve's stimulus measures, data from the firm's website shows.

Total Return, which is Pacific Investment Management Co.'s flagship fund with nearly $285 billion in assets, cut its exposure to mortgages -- its largest holding -- to 44 percent in November from 47 percent in October, and cut its Treasury exposure to 23 percent from 24 percent.

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

The fund has earned a 10.35 percent return so far this year, besting 89 percent of other intermediate-term bond funds, according to Morningstar.

PIMCO reported $1.92 trillion in assets as of September 30.

PIMCO's holdings benefited as purchases by the Fed of mortgage debt pushed up prices.

The Federal Reserve said on Wednesday it will continue to purchase $40 billion per month in agency mortgage securities as part of its bid to stimulate the economy. The Fed also said it will purchase $45 billion in longer-term Treasuries per month after the expiration at year-end of its "Operation Twist" program, under which has been buying longer-term Treasuries with proceeds from the sale of short-term debt.

By driving down interest rates on Treasuries and government agency-backed mortgage bonds, the Fed has aimed to support the housing market and also encourage investors to move out of lower-yielding securities and switch into other assets such as corporate bonds.

The average yield on agency mortage-backed securities is approximately 2 percent, according to data provided by Angel Oak Capital, while the 10-year Treasury yield was at 1.7005 percent in intraday trading Wednesday. In comparison, the average yield on agency mortgage-backed securities was approximately 3 percent a year ago.

The Total Return Fund, which is run by PIMCO founder and co-chief investment officer Bill Gross, has gradually reduced its mortgage holdings. In September, the fund had 49 percent of its portfolio in mortgage securities.

In his last investment letter of the year, Gross identified housing as a bright spot in economic growth. He also reiterated his view that emerging economies will grow faster than developed ones and that investors should expect diminished returns from both stocks and bonds.

The Total Return Fund also slightly reduced in its exposure to high-yield credit, an asset class that Gross cautioned against in his latest investment letter because of obstacles to economic growth, to 2 percent in November from 3 percent.

The fund slightly increased its exposure to U.S. agency government debt to 4 percent in November from 3 percent, and slightly increased its holdings in non-U.S. developed countries' debt to 12 percent from 11 percent.

The fund kept its exposure to municipal bonds, "other" credit, emerging market debt, and investment-grade credit unchanged in November.

(Reporting by Sam Forgione; Editing by Leslie Adler)

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