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Pimco Total Return cuts mortgage, U.S. government holdings in March: website

The headquarters of investment firm PIMCO is shown in this photo taken in Newport Beach, California January 26, 2012. REUTERS/Lori Shepler
The headquarters of investment firm PIMCO is shown in this photo taken in Newport Beach, California January 26, 2012. REUTERS/Lori Shepler

By Sam Forgione

NEW YORK (Reuters) - The Pimco Total Return Fund, the world's largest bond fund, cut its holdings of U.S. government-related securities and mortgages for the second straight month in March on continued bets that the Federal Reserve will conclude bond purchases this year, data from the firm's website showed on Wednesday.

The fund, which has $232 billion in assets and is managed by Pimco co-founder and chief investment officer Bill Gross, cut its holdings of U.S. government-related securities to 41 percent in March from 43 percent in February, and cut its mortgage holdings to 23 percent in March from 29 percent in February.

The fund's decreased holdings of mortgage securities in March kept the stake at its lowest level since at least late 2011, while the decrease in U.S. government-related holdings kept the stake at its lowest level since last November.

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"

The Federal Reserve, in an effort to spur hiring and lower long-term borrowing costs, is now buying $55 billion in U.S. Treasuries and mortgage-backed securities each month. The Fed, which started its stimulus program in 2012 and continued until December 2013 at an $85-billion pace, announced its latest cut to its monthly bond-buying program after a two-day meeting that ended March 19.

The Pimco Total Return Fund's asset allocation is important because Pimco manages roughly $1.9 trillion and is one of the world's largest bond managers. Pacific Investment Management Co is a unit of European financial services company Allianz SE .

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.

The fund also increased its U.S. credit holdings to 10 percent in March from 9 percent the previous month, its non-U.S. developed market holdings to 10 percent from 9 percent in February, and its holdings of "other" securities to 5 percent from 4 percent in February.

The Pimco Total Return Fund showed 5 percent exposure to money market and net cash equivalents, compared with zero percent in February, as Pimco scaled back on its mortgage and Treasury holdings.

The fund's increase to its non-U.S. developed market holdings kept the stake at its highest level since last April, when the position was last at 10 percent. The increase to "other" securities, which the firm said may include municipals, convertibles, preferred, and Yankee bonds, brought the stake to its highest since last October.

The fund increased its effective duration to 4.97 years in March from 4.71 years the previous month, and showed 5 percent exposure to money market and net cash equivalents, compared with zero percent in February.

Duration is a measure of a bond's price sensitivity to yield changes, while Pimco defines money market and net cash equivalents as liquid investment grade securities with duration of less than one year.

The fund fell 0.57 percent in March, trailing the returns of 95 percent of its peers, according to Morningstar. The fund is up 1.63 percent so far this year, trailing 86 percent of its peers. Investors pulled $3.1 billion out of the fund in March, extending its record outflow streak to 11 straight months.

Analysts have said that what hurt Pimco Total Return's performance most in March was its significant overweight position in shorter debt and its underweight position in long-dated bonds.

Short- and medium-term Treasury notes sold off, while long-term Treasury bonds gained slightly in price, after Federal Reserve Chair Janet Yellen said at a March 19 press conference that the Fed would probably end its massive bond-buying program this fall and could raise interest rates around six months later.

The Barclays 1-5 year U.S. Treasury index fell 0.3 percent in March, while the Barclays 25+ year U.S. Treasury index gained 0.82 percent for the month. Short- and medium-dated bonds are viewed as most vulnerable to a hike in overnight interest rates, which are currently near zero.

In his April letter to investors, Gross maintained his position on favoring shorter-maturing debt. He said fixed-income securities maturing in five years 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."

(Reporting by Sam Forgione; Editing by Diane Craft, Jennifer Ablan and Ken Wills)

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