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Pimco Total Return fund unloads U.S. government bond holdings

Manager Bill Gross says Treasury yields are artificially low because of Fed buying.

March 10, 2011|By Tom Petruno, Los Angeles Times
  • The Pimco Total Return fund cut its U.S. government-bond holdings to zero in February from 12% of assets at the end in January, according to company data. Above, the Newport Beach firms bond-trading room.
The Pimco Total Return fund cut its U.S. government-bond holdings to zero… (Don Bartletti, Los Angeles…)

Bond guru Bill Gross hasn't been shy about saying that he sees no value in U.S. Treasury bonds at current interest rates.

Now, he has jettisoned the last of those holdings from his $237-billion Pimco Total Return fund, the world's biggest bond fund.

The portfolio, managed by Pacific Investment Management Co. in Newport Beach, cut its U.S. government-bond holdings to zero in February from 12% of assets at the end in January, according to Pimco data.

The U.S. government-related category as defined by Pimco can include conventional Treasury bonds, securities of other government agencies, Treasury inflation-protected bonds and interest-rate swaps.

While dumping government bonds, Gross boosted his holdings of cash-like, short-term securities to 23% of the fund from 5% in January.

The rest of the portfolio is diversified among mortgage bonds, corporate debt, foreign bonds and municipal securities.

The fund is up 1.1% year-to-date, beating 74% of its peer funds.

In his monthly commentary on Pimco's website last week, Gross said Treasury bond yields were artificially depressed by as much as 1.5 percentage points because of a Federal Reserve bond-buying program known as quantitative easing.

The Fed in November committed to buying

$600 billion of Treasuries

in the market through midyear in an attempt to suppress longer-term interest rates and bolster the economy.

Gross, Pimco's founder and co-chief investment officer, has railed against the Fed's program, equating it to a Ponzi scheme.

"Many critics … including yours truly, would wonder whether quantitative easing policies actually heal, as opposed to cover up, symptoms of an unhealthy economy," Gross wrote in his commentary. "They might at the same time ask simplistically whether it is possible to cure a debt crisis with more debt."

Noting that the bond purchases the Fed has committed to make end in June, Gross wrote: "Who will buy Treasuries when the Fed doesn't? I don't know.... Someone will buy them, and we at Pimco may even be among them.

"The question really is at what yield and what are the price repercussions if the

adjustments are significant."

Treasury bond yields rose sharply in early February, a move that analysts at the time said was triggered by growing expectations that the economy was gaining momentum.

The five-year T-note yield surged from 1.92% on Jan. 28 to 2.4% by Feb. 8.

But yields have since declined again, helped in part by classic "flight to safety" buying by some investors as unrest in the Middle East and North Africa has escalated.

Treasury rates fell further Wednesday after the Treasury saw strong demand at an auction of $21 billion in 10-year notes, which sold at a yield of 3.5%, below expectations.

In market trading, the yield on previously issued 10-year notes slumped to 3.47% from 3.55% on Tuesday.

The five-year T-note fell Wednesday to 2.15% from 2.21% on Tuesday.

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