PIMCO's Gross Eliminates Treasuries Exposure

Zero exposure does not equal zero holdings

Don't believe everything you hear, especially if what you've heard is that PIMCO's Bill Gross has wiped the PIMCO Total Return Bond Fund of Treasuries. As Eric Jacobson, director of fixed-income research for Morningstar, said in an interview with Morningstar's Jason Stipp on Wednesday, "News started to roll around the market that he had been completely sold out of Treasuries, and lot of people took that to mean that he was so determined to avoid them that he had literally wiped them out of the portfolio, which isn’t exactly true."

What is true, Jacobson said, is that the portfolio has about 3% exposure to TIPS and agency bonds, or 6% total market value, but uses swaps that move in the opposite direction to counter interest rate risk. "So if you just look at the totals, it looks like zero, but in fact it’s broken up with a couple of parts," Jacobson said.

The difference between a portfolio with no government securities and one with zero market exposure, according to Jacobson, is that "in theory agency bonds don’t have to move exactly with Treasuries."

"As a percent of duration," he continued, "government-related securities are actually minus 14% in this portfolio at the end of February," reflecting Gross's negative sentiment on Treasuries. Furthermore, "when you look at the overall interest rate sensitivity in the portfolio, it's almost about 24% shorter than the Barclays Aggregate benchmark that everybody uses."

What is Gross investing in if he's so down on Treasuries? A little over one-third of the portfolio is in U.S. mortgages, according to Jacobson, as well as high-yield and investment-grade bonds – including investment grade bonds that are "tilted heavily" toward banks - and cash. Non-U.S. bonds are featured, as well.

"If you look at the history of the fund, they are certainly somewhere up in the upper echelons in terms of non-U.S. developed market bonds at about 5% and emerging-markets, interestingly enough, at about 10% of market value," Jacobson said.

"There is also a good chunk of municipal bonds," Jacobson added. "In fact, of the overall duration of the portfolio, it's even more--the numbers look relatively small at 4%. But they've got a pretty strong statement on those with some longer maturity municipals that they seem to like."

Gross wrote in a February commentary that "Treasury bonds may need to be 'exorcised' from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint."

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