The Pimco Total Return Fund, the world's largest bond fund, cut its holdings of U.S. mortgage securities for a third straight month in April to its lowest level since July 2010 on continued bets that the Federal Reserve will conclude bond purchases this year, data from the firm's website showed on Friday.
The fund, which has $230 billion in assets and is managed by Pimco co-founder Bill Gross, cut its mortgage holdings to 19 percent last month from 23 percent in March. The fund kept its holdings of U.S. government-related securities unchanged in April at 41 percent, Pimco said on its website.
Newport Beach, California-based Pacific Investment Management Co said its holdings of U.S. government-related securities may include nominal and inflation-protected Treasuries, Treasury futures and options, and interest rate swaps.
On March 7, Gross tweeted that investors should, "Sell what the Fed has been buying because they won't be buying them when Taper ends in October" In his latest Investment Outlook report, Gross said investors should "look to different areas of risk taking if you need higher returns."
The Federal Reserve, which has been buying mortgage-backed securities and U.S. Treasuries in order to drive down long-term borrowing costs and spur economic growth, on April 30 voted to pare its monthly asset purchases to $45 billion, in its fourth straight $10 billion cut.
Pimco Total Return's asset allocation is important because Pimco manages $1.94 trillion and is one of the world's largest bond managers. Pimco is a unit of European financial services company Allianz SE.
Pimco increased its U.S. credit holdings to 12 percent in April from 10 percent the previous month and increased its emerging markets holdings to 7 percent last month from 6 percent in March.
The fund has increased its non-U.S. developed market holdings all year, with its stake at 11 percent in April. Pimco's "other" securities category -- which the firm said may include municipals, convertibles, preferreds, and Yankee bonds -- remained at 5 percent of the portfolio's allocation.
Perhaps the most dramatic change to the Pimco Total Return Fund last month was its reduction in its effective duration to 4.73 years in April from 4.97 years in March. Duration is a measure of a bond's price sensitivity to yield changes. Effective duration stood at 4.71 percent in February.
In his April letter to investors, Gross emphasized underweighting duration and maintained his position on favoring shorter-maturing debt. He said fixed-income securities maturing in five to 30 years are "at risk" given reduced bond buying from the Federal Reserve.
Gross said: "While PIMCO agrees with Janet Yellen that such normalization will be a long time coming (the 12th of Never?), probabilities suggest that as the Fed completes its Taper, the 5-30 year bonds that it has been buying will have to be sold at higher yields to entice the private sector back in."
Pimco Total Return showed 5 percent exposure to money market and net cash equivalents in April, unchanged from the previous month. It defines the class as liquid investment grade securities with duration of less than one year.
(Reporting by Jennifer Ablan; Editing by Chizu Nomiyama and Leslie Adler)