Pimco's Biggest Fund Dumps Treasury Bond Holdings

Pimco's Total Return Fund, the world's biggest bond fund, has dumped all U.S. government-related securities, including U.S. Treasurys and agency debt.

The move was not a surprise given Pimco chief Bill Gross's recent statements that Treasurys are over-valued.

Getty Images Bill Gross of Pimco.

"It just gives people that follow him the bias not to bullish on the Treasury market," said Jefferies Treasury Strategist John Spinello. "He thinks rates are going higher."

In fact, there was little reaction in the bond market when news of move leaked out Wednesday morning.

In January, Pacific Investment Management's $236.9 billion Total Return fund slashed its U.S. government-related debt holdings to the lowest level in at least two years and increased cash and debt holdings from other developed nations.

Government-related securities include Treasurys, Treasury Inflation-Protected Securities, agencies, interest rate swaps, Treasury futures and options, and corporate securities guaranteed by the U.S. Federal Deposit Insurance Corp.

The Total Return Fund's cash holdings had surged to $54.5 billion as of Feb. 28 from $11.9 billion at the end of January.

Bill Gross, the fund's manager who helps oversee more than $1.1 trillion as Pimco's co-chief investment officer, has often railed against U.S. deficit spending and its inflationary impact. He has advocated buying bonds with "safe," higher yields — such as corporate bonds — that can withstand possible erosion of returns by inflation.

In December, Pimco said it may start investing up to 10 percent of its assets in "equity-related" securities, such as convertibles and preferred stock, after the first quarter of 2011.

"It's certainly an important signal in the sense that they are allocating away from Treasurys in favor of a higher spread product," said Christian Cooper, head of U.S. dollar derivatives trading at Jefferies.