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Pimco's Bill Gross

© Jason Reed / Reuters/Jason Reed/Reuters

Bill Gross, manager of the world's largest bond fund for Pimco, has admitted that it was a mistake to bet so heavily against the price of U.S. government debt.

Mr. Gross emptied his $244-billion Total Return Fund of U.S. government-related securities earlier this year in a high-profile call that has backfired as the bond market has rallied. As of Monday, Pimco's flagship fund ranked 501 out of 589 bond funds in its category.

"Do I wish I had more Treasuries? Yeah, that's pretty obvious," Mr. Gross told the Financial Times last week, adding: "I get that it was my/our mistake in thinking that the U.S. economy can chug along at 2 per cent real growth rates. It doesn't look like it can."

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When the yield on the 10-year Treasury was 3.5 per cent in January, Mr. Gross warned that the risk of rising inflation made government debt a poor investment.

Bond prices move in the opposite direction to bond yields, which he forecast would rise as Ben Bernanke, chairman of the Federal Reserve, brought the second program of bond buying, known as quantitative easing, to an end in June.

Mr. Gross, one of the most influential voices in the bond market, reiterated his warning to avoid Treasuries in June, and in the July dispatch of his widely read Investment Outlook, warned that promises to America's ageing population made them "debt men walking."

However, this month, as turmoil in equity markets caused investors to rush to the safety of government bonds, the 10-year Treasury yield dipped below 2 per cent, a 61-year low.

The move has forced Mr. Gross to reassess his bearish position on US debt in recent weeks. "We've moderated based on the outlook for the U.S. economy, based on what Bernanke has done at the Fed in the last month. Freezing rates for two years, that was a pretty significant statement in terms of the vulnerability of Treasuries to go down in price and up in yield," he said.

"It's not necessarily a flip-flop, as we don't own tons of Treasuries, but it's a recognition that the U.S. and developed economies are near the recessionary dividing point," he said.

Mr. Gross still argues that on a long-term basis, governments are likely to use financial repression, where the rate of inflation is higher than bond yields, to erode the value of sovereign debt over time.

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But he also suggested that the "new normal" – Pimco's view of the global economic outlook in which growth rates for developed countries are slower than in the past – may have to be revised downwards to a "new normal minus".

Mr. Gross, as co-chief investment officer, has built Pimco into one of the world's largest asset management firms through a astute money management, with high-profile investment views presented in colourful language. However, he argued that many of his peers were also short on Treasuries when compared with their benchmark, the Barclays Capital Aggregate bond index.

"I don't know that a 15 per cent underweight relative to the competition was a big deal, but it sort of became so in the headlines," he said.

Mr. Gross started to buy government debt, as well as related securities and derivatives, in recent months. However, he faces a challenge to catch up to the benchmark, which has returned 4.55 per cent for the year so far, versus the Total Return Fund's 3.29 per cent, according to Lipper, a research group.

"When you're underperforming the index, you go home at night and cry in your beer," he said, adding: "It's not fun, but who said this business should be fun. We're too well paid to hang our heads and say boo-hoo."

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