Pimco Total Return Cuts Government Debt as Fed Mulls Hikes

(Bloomberg) -- The Pimco Total Return Fund trimmed holdings of U.S. government and related debt to the lowest level since September as the bond giant warned inflation is picking up.

The $74.6 billion fund reduced its stake in government securities to 46.1 percent in January from 49.6 percent in December, based on a report on its website. Pimco cut mortgage holdings and added to its position in investment-grade credit.

Rising inflation expectations are driving bets the Federal Reserve will boost interest rates at least once in 2017. Investors are loading up on corporate debt, seeking bonds that are less closely correlated with inflation and may offer some protection as the world’s biggest economy expands.

“I don’t think the likelihood of higher inflation is being priced by markets,’’ Mihir Worah, Pimco’s chief investment officer for asset allocation, said on Bloomberg Television this week. Pimco, with $1.47 trillion in assets, is based in Newport Beach, California.

The debate over U.S. economic growth has gathered pace in the past month, with BlackRock Inc. Chief Executive Larry Fink and economists at Goldman Sachs questioning how how fast any pro-growth policies will emerge from U.S. President Donald Trump’s administration. Trump said Thursday he will have a tax reform plan within weeks, reigniting bets on the dollar and a decline in Treasuries.

Chicago Fed President Charles Evans said Thursday three interest-rate increases this year won’t be unreasonable, adding that inflation is moving “in the right direction.”

The difference between yield on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, widened to 2.09 percentage points in January, which was the highest since September 2014.

Mark Kiesel, Pimco’s chief investment officer for global credit, said in January the firm is favoring Treasury Inflation Protected Securities. It’s also upgrading the quality of its corporate bond holdings and sees value in mortgage-backed securities, he said.

Total Return Fund has returned 3.4 percent in the past year, beating 58 percent of its peers, based on data compiled by Bloomberg. The government and related holdings can include investments such as inflation-protected bonds, futures contracts and agency debt, according to Pimco’s website.

U.S. investment-grade corporate bonds have returned 6 percent in the past year, versus a 1.8 percent loss for Treasuries, the Bloomberg Barclays indexes show.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani