Gross back into Treasuries in a big way

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., boosted holdings of Treasuries in July during the biggest monthly rally in the securities since August 2010 as the U.S. confronted the possibility of default. Gross boosted his $245 billion Total Return Fund’s investment in U.S. government securities to 10 percent of assets in July from 8 percent in June, according to Newport Beach, California-based Pimco’s website. He cut cash equivalents and money-market securities to 15 percent from 29 percent, making it the lowest level in the fund’s cash holdings since January. A rally in Treasuries today on demand for a refuge pushed the yield on two-year notes to a record low 0.23 percent. The yield on 10-year securities was 2.37 percent after falling on Aug. 5 to 2.33 percent, the lowest level since October 2010. Treasuries returned 1.8 percent in July, the most since a gain of 2 percent in August 2010, according to Bank of America Merrill Lynch indexes. Standard & Poor’s showed “spine” by cutting the U.S. debt rating, Gross said in a Bloomberg Television interview with Tom Keene yesterday, contradicting Warren Buffett and Legg Mason Inc.’s Bill Miller, who said the rating company erred. Before June, Treasuries were included in a category known as government and government-related debt, which made up 12 percent of the Total Return Fund in January, the highest level this year. Developed Markets Bonds in developed markets outside the U.S. remained steady in the fund at 13 percent of holdings, while Gross kept holdings of emerging-market debt at 11 percent. Investors should buy assets of countries with “cleaner dirty shirts” and higher real interest rates, including Canada, Mexico, Brazil and Germany, Gross wrote in his monthly outlook on Aug. 2. Trillions of dollars in future spending cuts and tax increases are still necessary to stabilize the U.S. debt ratio as a percentage of gross domestic product to maintain a AAA credit rating, Gross wrote. Gross boosted holdings of mortgages to 25 percent from 21 percent, while swap and liquid rates rose to negative three percent from negative 9 percent. The government-Treasury category includes holdings of U.S. Treasury notes, bonds, futures and inflation-protected securities. The swaps and liquid rates sector includes U.S. dollar-denominated interest-rate swaps, swaptions, options, and other derivatives. A negative number in a category indicates a bet against U.S. government debt. Fund Returns The Total Return Fund has returned 5.39 percent in the past year, beating 59 percent of its peers, according to data compiled by Bloomberg. It gained 0.9 percent over the past month, beating 27 percent of its competitors. The firm managed $1.34 trillion in assets as of June. On Aug. 2, President Barack Obama signed a bill that ended the $14.3 trillion debt-ceiling impasse that pushed the Treasury to the edge of default. --Bloomberg News--