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Gross’ PIMCO makes a big move into mortgages

Gross’ PIMCO makes a big move into mortgages
October 12, 2011 – By Jennifer Ablan

NEW YORK (Reuters) – Bill Gross, manager of the world’s largest bond fund, ramped up buying of mortgage-backed securities in September 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 his $242 billion PIMCO Total Return Fund <PTTRX.O> 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.”

PIMCO’s latest bet on mortgages isn’t going unnoticed.

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 percent in August.

In having a so-called negative position in cash equivalents and money-market securities, it is an indication of derivative use and short-term securities being put up as collateral as a way to boost leverage and increase the fund’s holdings in bonds with longer maturities such as mortgage-backed securities, Treasuries and corporate bonds, according to Eric Jacobson, director of fixed-income research at Morningstar who has covered PIMCO for more than a decade.

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