PIMCO's Gross: I Made a Mistake

Pacific Investment Management Co. founder Bill Gross says he has "lost sleep" over a wrong call on US Treasury bond interest rates, which cost him in his Total Return bond fund.

(August 30, 2011) — Pacific Investment Management Co.’s (PIMCO) Bill Gross admits wrongdoing, saying that it was a mistake to cut his Treasury holdings.

In an interview with the Financial Times, Gross, the manager of the world’s largest bond fund, said that it had been a “mistake to bet so heavily against the price of US government debt.” He noted that he wishes he had invested more in US governmental debt earlier this year. “It was my/our mistake in thinking that the US economy can chug along at 2% real growth rates,” the newspaper cited Gross as saying. “The US and developed economies are near the recessionary dividing point.”

Gross said PIMCO had initially dumped the entirety of its US debt holdings in March as he expected economic growth to be higher, resulting in future inflation. The result: underperformance of PIMCO’s Total Return Fund. Since Gross’ moves, however, the US Treasury market has achieved a significant and impressive recovery.

Gross’ fund has returned 3.29% so far this year, less than the 4.55% recorded by the Barclay’s benchmark index.

Additionally, Gross told the FT that his view on the US economy changed significantly earlier this month after the Federal Reserve pledged to keep interest rates low for at least another two years. “Freezing rates for two years, that was a pretty significant statement in terms of the vulnerability of Treasuries to go down in price and up in yield,” Gross said.

Signs of Gross becoming more optimistic over US Treasuries appeared in early July, when the $242.7 billion Total Return Fund reported that it increased its allocation of US Treasuries from 5% to 8% at the end of June. At the time, the move ran counter to Gross’ frequent and vehement denunciations of the asset class.

“[PIMCO has] been selling Treasuries because they have little value within the context of a $75 trillion total debt burden,” Gross said in April. He had previously said that the Total Return Fund would move to hold no government debt for the first time in over two years, and urged investors to “revolt” against U.S. Treasuries.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742