Bill Gross, manager of the world's biggest bond fund at Newport Beach-based Pacific Investment Management Co., has pared his Treasury holdings to the lowest level in six months.
Gross and a growing number of investors are reducing Treasury bonds in favor of mortgage-backed securities as expectations for lower interest rates this year fade.
Pimco, a unit of Munich-based Allianz, has allocated more than half of its $100-billion Total Return fund to mortgage bonds and reduced holdings of Treasuries to 7% as of November. In May, the allocation to Treasuries was as low as 6%.
"We're simply in a period of time when there are leads and lags here, much like the leads and lags of Federal Reserve policy," Gross said in an interview last week. He has been predicting that bonds will rally this year as a weakening U.S. housing market prompts the Fed to cut rates.
Fund managers had an average of 26% of their money in mortgages as of Jan. 5, the most in four months, according to a survey by Jersey City, N.J.-based Ried, Thunberg & Co. That's up from 19% on Oct. 13, when traders were anticipating that the Federal Reserve would reduce its target for overnight loans between banks in this year's first quarter.
"We're looking for opportunities to add exposure to mortgages," said Jeff Given at John Hancock Advisers in Boston. The Treasury rally has "run out of steam."
On Tuesday, the yield on the benchmark 10-year Treasury note fell to 4.75%, from 4.77% on Friday. Bond markets were closed Monday for the Martin Luther King Jr. holiday.
Treasuries returned 3.11% in 2006, trailing the 5.32% gain on mortgages, according to Merrill Lynch & Co.
Treasuries rose 4.4% in the second half of last year after the Fed ended a series of 17 rate increases in June.