Pimco Total Return Fund posts strongest day ever

NEW YORK (Reuters) - The world's biggest bond fund, PIMCO's Total Return Fund, said it had its strongest ever day Monday as prices of mortgage-backed securities rose after the government seized control of mortgage finance agencies Fannie Mae (FNM.N) and Freddie Mac (FRE.N).

Mortgage-backed securities issued by the agencies had one of their biggest rallies ever on Monday, driving their spreads as much as 40 basis points tighter against comparable Treasuries, as investor demand surged after the government's bailout and explicit backing.

"Our mortgage overweight and the performance of mortgages on Monday gave the Total Return fund its greatest one day relative performance (compared to our index) in its history," Bill Gross, chief investment officer of Pacific Investment Management Co. told Reuters on Tuesday.

According to fund tracker company Morningstar, the PIMCO Total Return Fund's total returns for Monday were 1.32 percent. The Total Return Fund is benchmarked against the Lehman Brothers U.S. Aggregate Index, which rose by 0.81 percent on Monday, so the Total Return Fund outperformed its benchmark on Monday by 51 basis points, according to Morningstar.

The fund as of May held two-thirds of its holdings in mortgage-backed securities. That includes Fannie Mae and Freddie Mac agency MBS, which on Monday posted their biggest one-day gain ever in response to government control of the two issuers and pledges to increase purchases by the companies and Treasury.

Gross manages the $132 billion PIMCO Total Return Fund, which is up 5.20 percent this year and is outperforming its benchmark index by 1.74 percent, according to Morningstar.

On Sunday, Gross said that the U.S. Treasury's takeover of Fannie Mae (FNM.N) and Freddie Mac (FRE.N) should ultimately slow the decline of housing prices and help the U.S. economy.

Fannie Mae and Freddie Mac own or guarantee almost half of the country's $12 trillion in outstanding home mortgage and have $1.6 trillion in debt outstanding.

"By preserving the GSEs (government-sponsored enterprises) in current form -- at least for now -- and injecting sizable billions of dollars into the mortgage market, mortgage rates should come down, and the housing market will be healthier for it," Gross said.

(Reporting by Jennifer Ablan and John Parry; Additional reporting by Al Yoon, Editing by Richard Satran)