Pimco’s Gross Boosts Cash to Most Since Lehman Failed (Update2)

By Wes Goodman and Garfield Reynolds Dec. 18 (Bloomberg) -- Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., cut holdings of government debt and boosted cash to the most since Lehman Brothers Holdings Inc. collapsed in September 2008. Gross increased cash in the $199.4 billion Total Return Fund’s to 7 percent in November from negative 7 percent in October, according to Pimco’s Web site. The fund can have a so- called negative position by using derivatives, futures or by shorting. The fund reduced government-related debt to 51 percent of assets from a five-year high of 63 percent in October. Mortgages fell to 12 percent, the lowest since Pimco’s figures started in 2000, from 16 percent. Under what Newport Beach, California-based Pimco has termed the “new normal,” investors should be prepared for lower-than- average historical returns with heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy. Federal Reserve officials on Dec. 16 said the economy is strengthening and left the target rate for overnight loans between banks in a range of zero to 0.25 percent at the conclusion of its two-day policy meeting. The FOMC met after a week of reports suggesting economic growth picked up in the fourth quarter. Retail sales climbed 1.3 percent in November, twice as much as anticipated in a Bloomberg News survey of economists. Inventories rose in October for the first time since August 2008, and exports in the same month increased to the highest levels in 11 months. Growth, Jobs Gross said last month that the central bank is unlikely to raise interest rates until nominal gross domestic product increases 4 percent to 5 percent for another 12 months. GDP grew at a 2.8 percent annual pace in the third quarter, the Commerce Department said on Nov. 24. While the economy has returned to growth after the deepest recession since the 1930s, most economists surveyed by Bloomberg News predict the unemployment rate will exceed 10 percent through June. Consumer spending is still below its level of two years ago. The unemployment rate fell to 10 percent in November from a 26-year high of 10.2 percent the previous month, the Labor Department said on Dec. 4. The U.S. lost 11,000 jobs, compared with 125,000 jobs in a survey of economists by Bloomberg News. Mark Porterfield, a Pimco spokesman, has said the company doesn’t comment on fund holdings. 16 Percent Return Pimco’s government-related debt category can include conventional and inflation-linked Treasuries, agency debt, interest-rate derivatives and bank debt backed by the Federal Deposit Insurance Corp., according to Pimco’s Web site. Cash and equivalent securities may include commercial paper, short-term government and mortgage-backed securities, short- maturity company bonds and money market derivatives, according to the site. The Total Return Fund yielded 16 percent in the past year, beating 55 percent of its peers, according to data compiled by Bloomberg. The one-month return is 0.1 percent, outpacing 51 percent of its competitors. Pimco is a unit of Munich-based insurer Allianz SE. Derivatives are financial obligations whose value is derived from an underlying asset such as debt, stocks or commodities. Futures are agreements to buy or sell assets at a later specific price and date. Shorting is borrowing and selling an asset in anticipation of making a profit by buying it back after its price has fallen. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.