PIMCO's flagship fund trims Treasury, mortgage holdings

By Sam Forgione

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

The fund, which has nearly $278 billion in assets, slightly decreased its mortgage holdings to 49 percent in September from 50 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 third and left its portfolio of mortgage securities largely untouched. Many bond managers took steps to reposition their funds in the expectation the Fed would announce a new round of bond buying to push down borrowing costs even more.

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

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

In his last two investor letters, Gross, PIMCO's co-founder and co-chief investment officer, has addressed what he called the unsustainable debt levels that developed economies have accrued.

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

The Total Return Fund attracted about $6.25 billion in new money in the third quarter, the most among all bond funds according to Morningstar.

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

The fund slightly increased its use of U.S. dollar denominated interest rate swaps and other rate-related derivatives in September, and also increased its exposure to non-U.S. developed economies' debt to 11 percent from 7 percent the previous month.

Holdings in U.S. agency government debt, investment grade and 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)