January 10, 2014 / 11:51 PM / in 4 years

UPDATE 1-Pimco Total Return Fund lifts U.S. gov't holdings to 45 pct-website

By Sam Forgione

NEW YORK, Jan 10 (Reuters) - The Pimco Total Return Fund, the world’s largest bond fund, significantly increased its holdings of U.S. government-related debt in December even as continued selling pressure on the bonds contributed to the fund’s biggest annual loss in nearly two decades, data from the firm’s website showed on Friday.

The fund, which has $237 billion in assets and is managed by Pimco co-founder and co-chief investment officer Bill Gross, showed an increase in holdings of U.S. government-related securities to 45 percent in December from 37 percent in November.

Pimco said on its website that its holdings of U.S. government-related securities may include nominal and inflation-protected Treasuries, Treasury futures and options, and interest rate swaps.

That marked the fund’s biggest exposure to the securities since at least June of last year, when the firm introduced the category of “U.S. government-related debt” on its website.

The fund’s asset allocation is important because Pimco manages roughly $1.97 trillion and is one of the world’s largest bond managers. The Newport Beach, California-based Pacific Investment Management Co is a unit of European financial services company Allianz SE.

The fund also posted an increase in its mortgage holdings to 35 percent in December from 34 percent in November, maintaining the securities as its second-largest holding.

The fund showed a negative position of 6 percent in money market and net cash equivalents in December after showing a 5 percent exposure in November. The firm defines money market and net cash equivalents as liquid investment grade securities with duration less than one year.

In having a so-called negative position in cash equivalents and money-market securities, it is an indication of using derivatives and short-term securities as collateral in order to boost the fund’s buying power with leverage.

The fund also increased its holdings of non-U.S. developed market securities to 6 percent in December from 4 percent in November, marking the largest exposure to the securities since May of last year.

Gross’s fund fell about 1 percent in December, beating just 5 percent of peers for the month, according to Morningstar. The fund fell 1.9 percent last year, marking its biggest annual decline since 1994 and its first annual loss since 1999, Morningstar data showed.

The yield on the benchmark 10-year U.S. Treasury rose about 27 basis points in December and topped 3 percent on Dec. 27, a 2-1/2-year high. Bond yields move inversely to prices. The selling pressure came in the wake of the U.S. Federal Reserve’s announcement on Dec. 18 that it would cut its monthly stimulus by $10 billion starting in January.

Investors pulled a record $41.1 billion from Gross’s fund last year on the negative performance, even though his fund was not alone in suffering losses.

The Barclays U.S. Aggregate bond index, the benchmark by which many U.S. funds gauge performance, fell more than 2 percent in 2013 to mark its first annual loss since 1999 and its biggest decline since 1994.

Gross’s increase to U.S. government-related securities came after Gross has recommended short-dated bonds on the belief that the Federal Reserve will keep short-term interest rates low until at least 2016.

In his monthly letter to investors released Thursday, Gross said that the Fed would not hike short-term rates given the low inflation.

“At the moment, the Fed’s fork or target for PCE inflation is 2.0 percent or higher while December’s annualized rate was only 1.2 percent,” Gross said. Gross called the PCE annualized inflation rate “the critical monthly statistic for analyzing Fed policy in 2014.”

The Fed has kept the key Federal funds rate between 0-0.25 percent since late 2008 to help the economy recover from recession, and has promised to keep it there for a while longer, probably until 2015.

The Pimco Total Return fund kept unchanged its holdings of U.S. credit at 10 percent, emerging markets at 6 percent, and “other” securities at 4 percent.

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