PIMCO Slashes US Government Holdings

(February 16, 2011) — The $239 billion Pacific Investment Management Co. (PIMCO) Total Return Fund, the world’s largest fixed-income mutual fund, slashed its US government-related debt holdings last month to its lowest level since 2009 before US bond yields rose this month to their highest level in almost a year.

Commenting on the general inclination to stray from US government-related debt, NEPC Chief Investment Officer Erik Knutzen told aiCIO: “Such a move can reflect the view that the risk-reward for US government securities has changed over the last couple years. Rates have gone higher and will continue to go higher, and the potential of inflationary pressures on rates could translate to higher interest rates and higher growth in other parts of the world, such as emerging markets. So reducing government debt at this time is consistent with overall themes within the economic market environment.”

The move by Bill Gross came just before US bond yields rose this month to their highest level in almost a year, and reflects comments he made a few weeks ago when he criticized US deficit spending and the quantitative easing measures used by the Federal Reserve and other central banks. Gross had voiced concern over the Fed’s low interest rates, which he claimed were “robbing” savers and long-term asset managers.

In a report titled “Devil’s Bargain” Gross further criticized financial innovation, such as securitization, urging investors to analyze other yields and assets. “Fifty years ago, the highest paid and most prestigious professions were that of a doctor or a 707 airline pilot who flew the “golden” route from Los Angeles to Honolulu,” he wrote. “Today the yellow brick road begins on Wall Street or the City…the money is made from securitizing things instead of booting and rebuilding America. The tallest buildings in almost every major city are banks, with tens of thousands of people shuffling and trading paper for a living.”

According to PIMCO’s website, US government-related securities — defined as US Treasures, government agency debt, interest rate swaps, futures and options and FDIC-guaranteed corporate securities — now constitute just 12% of the Total Return Fund as of last month, down from 22% in December.

Gross has warned that the 30-year run in bond prices will soon end.

As of last Friday, PIMCO’s Total Return fund — the best performing fund in its category over the last 15 years, according to Morningstar – has lost 0.34% year-to-date. Last year, the fund was up 7%.