In a Special Edition letter posted on PIMCO’s website, Gross, who runs the $242 billion PIMCO Total Return portfolio, wrote that he underestimated the contagion effect from the Europe debt crisis and the U.S. debt ceiling debacle.
“As Europe’s crisis and the U.S. debt ceiling debacle turned developed economies toward a potential recession, the Total Return Fund had too little risk off and too much risk on,” said Gross, who also shares the title of co-chief investment officer at Pacific Investment Management Co. with Mohamed El-Erian.
Gross, who helps manage more than $1.2 trillion at PIMCO, said late Friday the Total Return fund had positions in German bonds and Canadian Treasuries to counter the U.S. underweight position, “but not enough.”
That’s all changed, of course. Gross said PIMCO’s internal growth forecast for developed economies “is now zero percent over the coming several quarters and the portfolio more accurately reflects this posture.”
Last week, Reuters reported that Gross ramped up buying of mortgage-backed securities in September, albeit by using leverage, on the likelihood the Federal Reserve’s reinvestment program in those securities will boost prices significantly.
Gross increased mortgage debt to 38 percent of assets in September, from 32 percent in August, as the U.S. central bank announced last month that it “will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.”
His move into mortgage-backed securities also comes as the PIMCO Total Return fund’s cash equivalents and money-market securities fell to negative 19 percent September, from negative 9.0 percent in August.
In having a so-called negative position in cash equivalents and money-market securities, it is an indication of using derivatives and short-term securities as collateral in order to boost the fund’s buying power with leverage.
Gross’ move to seek more yield by putting more money into mortgage bonds is yet another bold bet which many will be watching after Gross’s call on Treasuries cost his fund’s performance. In doing so, he is effectively extending the average duration of his fund’s investments, making them potentially more exposed to a rise interest rates.
In his “mea culpa” letter, Gross resorted to baseball analogies and metaphors. He closed his letter by saying: “This is big league ball, where your ticket holders come to the park expecting not a circus-Willie Mays-catch but more wins than losses and a year-end performance that places your bond assets near the top of the standings.”
- PIMCO Says Betting Against Debt Was A Mistake: Report
- George Soros Ends Nearly Four-Decade Run As Hedge Fund Manager
- Bérénice Marlohe: Bond Girl For ‘Bond 23′?
- S&P Possibly To Rate Sub-Prime Securities Higher Than U.S. Treasury Bonds
- Dow Moves Lower As Fed Implements “Operation Twist”
Category: Business/ Economy
There are no comments yet. Why not be the first to speak your mind.