Recently, legendary bond investor and PIMCO managing director Bill Gross released his “Investment Outlook” for November 2008. Notable excerpts included the following:

The Half-Century Party

The era now coming to an end is not a one-generational bull market that was born out of the ashes of double-digit inflation, and the end of governmental strangulation of private initiative in the early 1980s. It was much more, and much longer in duration. The past era can best be described as a more than half-century build up in credit extension and levered finance.

Hubris

What is important, though, is that at some point early in the 21st century, things began to go terribly wrong with this miracle of modern finance. It was spreading substantial benefits via diversification and indeed the productive powers of lending upon which capitalism depends. But it had assumed an arrogance – if a secular phenomenon can be personified – that nothing could go wrong. It was promoting not just smooth sailing – a moderation – but a “great moderation.” Unstoppable. Except, of course, for that homeowner in Modesto, California, who bought a marked-up home for $500,000 with no money down and a 2% teaser interest rate. Even the pinnacle of levered finance could not support that fantasy and so, as yields inevitably rose and the defaults began in 2006, our great moderation was exposed for what it was – a naked swimmer at high tide.

PIMCO’s Investment Strategy

There will come a time, however, perhaps over the next few weeks or months, when deleveraging of the private sector is met by the leveraging up of the government sectors: the TARP, CPFF, and MMIFF will inject over a trillion dollars of liquidity into the system over a short period of time. At that point, our nuclear atom will begin to stabilize and it should be safer to move a little distance back out toward the perimeter where yields and potential returns are very attractive. PIMCO would focus on the following:

1. A continued above-average allocation to agency mortgage-backed securities – now yielding close to 6%.
2. An overweight position in bank capital – bonds and preferred stock in companies where the Treasury has an equity stake. With Uncle Sam as your partner, default seems remote.
3. A focus on the frontend of the yield curve. The Fed will stay low for an extended period of time while the inevitable inflationary pressures of government bailouts lay further out on the yield curve.

You can access the entire piece from the PIMCO website here.

Source:

“Investment Outlook”
Bill Gross
PIMCO, November 2008

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According to the Wall Street Journal this morning, the world’s largest bond fund company Pacific Investment Management Company (PIMCO) favors agency mortgage-backed securities instead of government debt. PIMCO was founded by legendary bond investor Bill Gross, who serves as chief investment officer of the California-based investment firm. Min Zeng wrote this morning:

Despite the woes rocking mortgage companies Fannie Mae and Freddie Mac, bond-fund company Pacific Investment Management Co. continues to favor agency mortgage-backed securities over government debt.

Steve Rodosky, head of Treasury and derivatives trading at Newport Beach, Calif.-based Pimco, said the unit of Allianz SE prefers agency mortgage-backed securities, or MBS, the so-called pass-throughs sold by federally chartered firms, over debentures of the two companies as well as Treasurys as they provide more attractive yields.

“The best opportunities in the markets are in high-quality agency MBS,” Mr. Rodosky said in an interview Thursday. “You are getting a collateralized piece of paper at a significantly wider spread.”

The Journal’s Min Zeng noted:

Pimco’s flagship $129.56 billion Total Return Fund increased its mortgage-bond holdings last month to 65% from 61% in June, according to the data from the company’s Web site. In contrast, the fund continued to shed government-debt holdings, including Treasurys and agency debt last month for the seventh straight month. The fund is the world’s largest bond fund and is run by Bill Gross, the company’s chief investment officer.

Source:

“Despite Fuss, Mortgage-Backed Bonds Have Fans”
Min Zeng
Wall Street Journal, August 22, 2008

Bloomberg’s Deborah Finestone did some research yesterday and found that Pacific Investment Management Co.’s Bill Gross increased holdings of mortgage debt in the world’s largest bond fund to the highest since 2000, while at the same time put on the biggest bet against government debt since at least the same year.

Finestone wrote yesterday:

The $125.1 billion Pimco Total Return Fund had 59 percent of assets in mortgage debt in March, up from 52 percent the prior month and 23 percent in March 2007, according to data on the Newport Beach, California-based firm’s Web site. The fund’s cash position dropped to 32 percent, the lowest since July 2006, from 34 percent in February…

The fund also increased derivative positions that make it short in Treasuries, meaning it will profit from declines in the securities. It held negative 18 percent of assets in government debt in March, the most bearish stance since at least June 2000, according to data compiled by Bloomberg News.

PIMCO, which is a unit of Munich-based insurer Allianz SE, manages $746.3 billion. The Total Return Fund, which through Wednesday had earned 4.03 percent this year, has outperformed all competitors in the intermediate bond fund category, according to Chicago-based research firm Morningstar.

Source:

“Pimco’s Gross Holds Most Mortgage Debt Since 2000 (Update1)”
Deborah Finestone
Bloomberg, April 10, 2008