PIMCO's flagship fund trims Treasury, mortgage holdings

By Sam Forgione

NEW YORK, Oct 10 (Reuters) - Bill Gross's PIMCO Total ReturnFund, the world's largest mutual fund, trimmed its exposure tomortgage securities and U.S. government debt in September afterthe U.S. Federal Reserve announced a plan to buy up to $40billion in mortgage securities a month, data from the company'swebsite show.

The fund, which has nearly $278 billion in assets, slightlydecreased its mortgage holdings to 49 percent in September from50 percent in August and lightened its exposure to U.S.government securities to 20 percent from 21 percent.

In August, in the run-up to the Fed's announcement on Sept.13, Gross's fund slashed its exposure to Treasuries by a thirdand left its portfolio of mortgage securities largely untouched.Many bond managers took steps to reposition their funds in theexpectation the Fed would announce a new round of bond buying topush down borrowing costs even more.

PIMCO, Pacific Investment Management Co, which had $1.82trillion in assets as of June 30, noted on its website that theflagship fund's holdings of government debt include U.S.Treasury notes, bonds, futures, and inflation-protectedsecurities.

The slight decreases follow the Fed's announcement on Sept.13 that it would buy government guaranteed mortgage-backedsecurities each month until the outlook for jobs improves.

In his last two investor letters, Gross, PIMCO's co-founderand co-chief investment officer, has addressed what he calledthe unsustainable debt levels that developed economies haveaccrued.

In his October letter, Gross wrote that the United States"will begin to resemble Greece before the turn of the nextdecade" if it does not cut spending or raise taxes by 11 percentof gross domestic product within the next five to ten years.

The Total Return Fund attracted about $6.25 billion in newmoney in the third quarter, the most among all bond fundsaccording to Morningstar.

The fund is up 9.27 percent so far this year and is in thetop 5 percent of intermediate investment-grade bond funds,according to Lipper.

The fund slightly increased its use of U.S. dollardenominated interest rate swaps and other rate-relatedderivatives in September, and also increased its exposure tonon-U.S. developed economies' debt to 11 percent from 7 percentthe previous month.

Holdings in U.S. agency government debt, investment gradeand high-yield credit, emerging market debt, municipal bonds and"other" kinds of credit did not change in September.

(Reporting by Sam Forgione; Editing by Peter Galloway)