Bill Gross, manager of PIMCO's Total Return Fund and matching ETF, reportedly cut exposure to U.S. Treasuries and mortgages before the Federal Reserve said it plans to keep rates low until unemployment falls below 6.5%.
The famed bond manager also said PIMCO may lower its risk profile next year after posting above-average performance in 2012.
Earlier this week, the Fed said it will buy $45 billion a month of Treasury securities beginning January on top of the $40 billion a month in mortgage debt purchases, reports Liz Capo McCormick for Bloomberg.
"What really happens, and this is critically important, is that the Treasury issues bonds and the Fed buys them and then it remits interest to the Treasury," Gross said in the article. "It means the Treasury is issuing debt for free. There are complications. Inflation is one of the complications."
In his flagship Total Return Fund, Gross lowered mortgage bond holdings to 44% of the total portfolio from 47%, and U.S. government and Treasury debt was also lowered to 23% of assets from 24%, Bloomberg reports.
Meanwhile, Gross raised the fund's position in non-U.S. developed nations to 12% from 11% in November. He also reduced high-yield junk bonds to 2% from 3% in October.
As the Fed pressures interest rates on Treasuries and government agency-backed mortgage debt, the central bank is supporting the housing market and pushing investors out of lower-yielding securities and into other fixed-income assets like corporate bonds, reports Sam Forgione for Reuters.
PIMCO Total Return ETF (NYSEARCA:BOND) currently holds government Treasury 10%, Government agency 2%, mortgage 41%, investment grade 7%, high yield 4%, non-U.S. developed 12%, emerging markets 1%, municipal %, other 4% and money market/cash equivalents 11%. BOND has a 2.20% 30-day SEC yield and a 0.55% expense ratio.
With interest rates so low and corporate spreads so tight, "you have to be leery of prices going the other way," Gross told Bloomberg. PIMCO "might begin a shift toward something safer, and something more clean in terms of those dirty-shirt investments."
Max Chen contributed to this article.
Full disclosure: Tom Lydon's clients own BOND.
Disclosure: I am long BOND. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.