Bloomberg -- Pacific Investment Management Co.’s Bill Gross added to holdings of Treasuries in his flagship fund in June while betting incorrectly on gains in U.S. inflation- indexed securities during the first half of the year.

The proportion of U.S. government debt in the $268 billion Total Return Fund rose to 38 percent, from 37 percent in May, according to data on Pimco’s website. The Newport Beach, California-based company doesn’t comment directly on monthly changes in holdings or specific types of securities within a market sector, such as the percentage of Treasury Inflation Protected Securities in the U.S. grouping.

Gross had been buying TIPS on a bet that money printing by the world’s central banks would push up consumer prices, making Treasuries the largest portion of the fund. When yields began to rise in May on expectations the Federal Reserve would slow its bond-buying program, inflation expectations didn’t, amplifying the losses on inflation-hedged U.S. debt. The world’s largest mutual fund fell 4.7 percent in May and June, prompting $9.9 billion in withdrawals last month, the most on record.

While the yield on 10-year Treasuries soared as high as 2.75 percent on July 8, from a low of 1.61 percent on May 1, yields on inflation-indexed debt climbed even faster and further. As a result, the narrowing in the difference between yields of Treasuries and TIPS, known as the break-even rate, showed that investors viewed inflation as less of a threat in the short term and thus were cutting the price they would pay for insurance against it.


The break-even rate on the 10-year bonds dropped to 1.81 percent on June 24, the lowest since October 2011. The rate was 2.09 today, while the yield on the 10-year Treasury note rose two basis points to 2.55 percent. The 10-year yield will fall to 2.49 percent by the end of the third quarter before ending the year at 2.61 percent, according to Bloomberg surveys of banks and securities companies, with the most recent predictions given the heaviest weightings.

Gross, co-founder and co-chief investment officer at Pimco, also added to holdings of mortgage securities, the fund’s second largest holdings. The proportion rose to 36 percent last month, from 34 percent in May.

He cut non-U.S. developed nations’ debt to 5 percent, from 7 percent in May. Investment-grade credit holdings were unchanged at 6 percent in June.

The Total Return Fund’s emerging-market debt holdings were also steady at 7 percent from the previous month.

Over the past five years, the Total Return Fund has returned 7.2 percent, outperforming about 91 percent of competitors. It gained 0.15 percent over the past year, placing it in the 66 percentile of its category, according to data compiled by Bloomberg.

The Total Return Fund’s government and Treasury debt category includes fund holdings of U.S. Treasury notes, bonds, futures and inflation-protected securities.

Pimco, a unit of the Munich-based insurer Allianz SE, managed $2.04 trillion in assets as of March 31.



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