Pimco’s Gross Increases U.S. Debt to Six-Month High (Update2)

By Susanne Walker

June 17 (Bloomberg) -- Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., boosted holdings of U.S. government-related debt to the highest level in six months as Europe’s sovereign debt crisis increased the refuge appeal of the securities.

The $227.9 billion Total Return Fund’s investment in the debt was increased to 51 percent of assets in May, from 36 percent the previous month, according to the website of Newport Beach, California-based Pimco. Gross cut holdings of non-U.S. developed debt to 6 percent from 13 percent, the lowest since November and increased emerging market debt to a record 9 percent.

Treasuries, part of the government-related category, are the premier holdings for fixed-income investors with the U.S. economy failing to produce private sector jobs and Europe’s fiscal crisis threatening the region’s banking sector, Gross, 66, said this month. U.S. debt had its best month in May for more than a year, Bank of America Merrill Lynch indexes show.

Gross said in March, before European policy makers last month unveiled a rescue package for the region’s sovereign debtors worth almost $1 trillion, that the almost three-decade rally in Treasuries may be drawing to a close.

“The U.S. is the least dirty shirt,” Gross, Pimco’s co- chief investment officer, said during a June 4 radio interview on Bloomberg Surveillance with Tom Keene. “The world is full of dirty shirts in terms of excessive debt, and the United States is one of those countries, but it still remains the reserve currency and still remains the flight-to-quality haven.”

Credit-Default Swaps

U.S. Treasuries gained 1.7 percent in May, with 10-year yields dropping to a one-year low of 3.06 percent, according to a Bank of America Merrill Lynch index. That was the biggest rally since March 2009, when the Total Return Fund raised its holdings of U.S. government-related debt to 28 percent from 15 percent in February 2009.

Treasuries headed for a weekly advance on speculation signs of a struggling economy will convince the Federal Reserve to keep interest rates low. The 10-year note yielded 3.20 percent as of 8:53 a.m. in Tokyo, according to BGCantor Market Data, down from 3.24 percent on June 11.

Pimco’s U.S. government-related debt category can include conventional and inflation-linked Treasuries, agency debt, interest-rate derivatives, Treasury futures and options and bank debt backed by the Federal Deposit Insurance Corp., according to the firm’s website.

Mortgages, Junk Holdings

Gross held the Total Return Fund’s mortgage composition in May steady at 16 percent and decreased its high-yield holdings to 3 percent from 4 percent. It cut its net cash-and-equivalent position to negative 4 percent, the least since October 2009. Emerging-market debt was increased to a record 9 percent from 7 percent, and non-U.S. developed nation debt was cut to a six- month low.

Gross opted to insure debt from developed countries rather than buy it earlier this year. The Total Return Fund increased the credit-default swaps it sold on bonds from Group of Seven nations such as the U.S. and the U.K. to more than $3 billion in the first quarter, according to a June 7 regulatory filing. The fund was insuring debt from six of the G-7 countries as of March 31, while no longer holding a $30 million contract on Italian bonds.

Rescue Package

The credit swaps enable Pimco Total Return to earn premiums without taking the risk, frequently cited by Gross, that rising G-7 budget deficits will fuel inflation, pushing up interest rates and driving down bond values. Pimco said the chance of a default by countries such as the U.S. and U.K. is diminished because they control individual currencies with which to pay creditors, unlike Greece and other euro-zone nations.

Investors should buy the debt of countries such as Germany and Canada that have low deficits and higher-yielding corporate securities, he said at that time. Excess borrowing in nations including the U.S. and U.K. will eventually lead to inflation as governments sell record amounts of debt to finance surging deficits, Gross said in a March interview with Bloomberg Radio.

The European Union announced last month a rescue package of almost $1 trillion, with support from the International Monetary Fund, to shore up the finances of the region’s weakest economies amid concern governments will struggle to narrow their budget deficits.

Total Return Fund

Spain is in the process of restructuring savings banks and preparing to publish stress tests on lenders. It will use less than a third of its 99 billion-euro ($122 billion) bank-rescue fund it created last year, Finance Minister Elena Salgado said today in Madrid.

Under what Pimco has termed the “new normal,” investors will face lower-than-average returns with heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy.

Pimco’s Total Return Fund returned 12.34 percent in the past 12 months, beating 57 percent of its peers, according to data compiled by Bloomberg. It made a return of 0.17 percent over the past month, a performance superior to 82 percent of competitors. Pimco, a unit of Munich-based insurer Allianz SE, managed $1.07 trillion of assets as of March 31.

Pimco’s spokesman Mark Porterfield has said the firm doesn’t comment on monthly changes in portfolio holdings.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net