Pimco's Wise Move

Gross Eliminates Government Debt From Fund

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., eliminated government-related debt from his flagship fund last month as the U.S. projected record budget deficits.

Pimco’s $237 billion Total Return Fund last held zero government-related debt in January 2009. Gross had cut the holdings to 12 percent of assets in January, according to the Newport Beach, California-based company’s website. The fund’s net cash-and-equivalent position surged from 5 percent to 23 percent in February, the highest since May 2008.

Yields on Treasuries may be too low to sustain demand for U.S. government debt as the Federal Reserve approaches the end of its second round of quantitative easing, Gross wrote in a monthly investment outlook posted on Pimco’s website on March 2. Gross mentioned that Pimco may be a buyer of Treasuries if yields rise to attractive levels.

Pimco reduces Derivatives exposure

Bill Gross is starting a new version of his Pimco Total Return Fund that will rely less on derivatives and leverage, two of the tools he used to build Total Return into the world’s largest mutual fund.

The new fund, identified as Pimco Total Return Fund IV in a February regulatory filing that details the changes, will forgo high-yield debt, borrowing to create leverage, and investing in options. It will serve as an alternative to rather than a replacement for Pimco Total Return, which had $237 billion in assets as of last month.


As we indicated in our previous post, there are some who get it and some who don't. Deleveraging is mission critical during Economic Winter. We reviewed this idea before as we examined Exter's Inverse Liquidity Pyramid.

Pimco's Bill Gross has the right idea.

The question is, will he reduce leverage quickly enough to preserve capital this year if the market drops as quickly as I anticipate?