By Sam Forgione and Jennifer Ablan
NEW YORK Feb 11 The PIMCO Total Return Fund,
the world's largest bond fund run by Bill Gross, decreased its
mortgage holdings to its lowest level since mid-2011, ahead of
the prospect of higher interest rates and emerging inflationary
The $285.6 billion fund also in January increased its
exposure to U.S. government and Treasury-related securities,
which include U.S. Treasury notes, bonds, futures, and
inflation-protected securities, data from the firm's website
showed on Monday. PIMCO increased its Treasury holdings to 30
percent from 26 percent, the most since July.
The PIMCO Total Return Fund decreased its exposure to
mortgages, its largest holding, to 37 percent in January--the
lowest since August 2011--from 42 percent in December, after
hugely profitable bets last year. The PIMCO fund was up 10.36
percent in 2012, surpassing 88 percent of peers.
PIMCO reaped huge profits from its mortgage holdings after
the Federal Reserve began monthly purchases of $40 billion in
government-backed mortgage-backed securities in an effort to
stimulate the U.S. housing market and economy, a move the
central bank announced last September.
Gross, who is also the co-chief investment officer at PIMCO,
had repeatedly noted that with U.S. Treasury yields at
extraordinary low levels, PIMCO had migrated toward
mortgage-backed securities, or MBS, as those securities not only
sported higher yields but they performed well when interest
rates were stable.
When rates rise sharply, as they have begun to since the
start of the year, there's less incentive for homeowners to
refinance; thus prepayments of principal in mortgage-backed
securities slow and prices fall more quickly than for other
bonds and duration increases. (Duration is a measure of a bond's
price sensitivity to yield changes.)
To maintain their portfolios' duration relative to the
benchmark, MBS investors must buy non-callable Treasury bonds
when rates fall, and sell them when rates rise. This forced
buying and selling exacerbates volatility of the overall market.
The PIMCO Total Return fund is the flagship of Pacific
Investment Management Co., based in Newport Beach, California,
which is a unit of European financial services company Allianz
SE and had $2 trillion in assets as of Dec. 31.
The fund slightly decreased its holdings of investment-grade
credit to 9 percent from 10 percent in December, but kept its
exposure to riskier high-yield "junk" credit unchanged at 2
The PIMCO Total Return Fund is down 0.21 percent so far this
year, as it is feeling the bite of slowly rising interest rates,
but is still besting 67 percent of other U.S. intermediate-term
bond funds, according to Eric Jacobson, director of fixed-income
fund research at Morningstar. The fund attracted $1.08 billion
in new cash in January, Morningstar added.
The fund left its exposure to emerging market debt, non-U.S.
developed markets, municipal bonds, U.S. government agency debt,
and "other" forms of credit unchanged in January.
Its holdings of emerging market securities stayed at 7
percent, its holdings of non-U.S. developed market securities at
12 percent, its holdings of municipal bonds at 5 percent, its
holdings of U.S. government agency debt at 4 percent, and its
holdings of "other" forms of credit at 1 percent.
In his February letter to investors, entitled "Credit
Supernova!," Gross said heavy reliance on credit in the United
States will lead to inflation and, eventually, a breakdown in
Gross said inflation-protected Treasuries and bonds of
Mexico, Brazil, Italy, and Spain could produce returns of 3 to 4
percent, while the stock market could earn 5 to 6 percent.