UPDATE 2-PIMCO flagship cuts mortgages, ups Treasuries in Dec.

Thu Jan 10, 2013 5:39pm EST

NEW YORK Jan 10 (Reuters) - The PIMCO Total Return Fund , the world's largest bond fund, increased its Treasury holdings while decreasing its mortgage holdings in December, data from the firm's website showed on Thursday.

The fund, which is run by Bill Gross, the founder and co-chief investment officer of Pacific Investment Management Co, increased its exposure to Treasuries to 26 percent from 23 percent in November. The fund decreased its biggest holding, mortgage securities, to 42 percent from 44 percent.

The fund earned a return of 10.36 percent in 2012, besting 88 percent of U.S. intermediate-term bond funds, according to Morningstar. The fund attracted $18 billion in new cash over the year, Morningstar said.

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.

Pacific Investment Management Co. had $1.92 trillion in assets as of Sept. 30, 2012, according to its website.

Gross, in his latest investment letter earlier this month, wrote that the U.S. Federal Reserve's monthly purchases of mortgages and Treasury securities will lead to inflation and gradually weaker investment returns. The Fed pledged to buy Treasury bonds and agency mortgage securities at $85 billion per month last December.

"Investors should be alert to the longterm inflationary thrust of such check writing," Gross wrote in the January letter, entitled "Money for Nothin' Writing Checks for Free."

With regard to corporate bonds, the flagship fund trimmed its exposure to investment-grade credit to 10 percent i n December fr om 11 percent th e prior month am id a huge rally, w hile leaving its exposure to high-yield credit unchanged at 2 percent.

T he fund cut its exposure to emerging market securities to 7 percent last month from 8 percent. The cut came despite Gross's comment in an investment letter in October that developing countries are more in control of their budgets and have less debt than developed ones.

The fund kept its municipal bond holdings unchanged at 5 percent and left a 12 percent exposure to non-U.S. developed market credit untouched last year.

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