If mortgages are so "toxic" why is Bill Gross buying them?

[Joanne98]

Feb. 11 (Bloomberg) -- Bill Gross, manager of Pacific Investment Management Co.’s $136 billion Total Return Fund, bought mortgage-backed bonds in January, bringing the percentage of the fund’s assets in mortgages to the highest in at least a year.

Pimco’s co-chief investment officer held 83 percent of the fund’s assets in mortgage-backed securities at the end of January, according to the Newport Beach, California-based company’s Web site. Gross advised buying mortgages this month amid government support for the securities. Treasury Secretary Timothy Geithner yesterday said the government may expand the Term Asset-Backed Securities Loan Facility to include commercial mortgage-backed securities.

Mortgages are “a very safe and well-supported security based upon what the Treasury has announced and the Fed has announced that it’s going to do,” Gross said in a Feb. 6 interview on Bloomberg television.

Gross sold government debt, sending the fund’s holdings to minus two percent, after adding to his holdings in December for the first time in a year. The fund held negative positions in Treasuries and debt issued by government-backed agencies such as Fannie Mae, Freddie Mac and the Federal Home Loan Bank system.

At the end of December, Gross held nine percent of assets in U.S. government debt and 62 percent of mortgage-backed bonds.

Gross’s Total Return Fund, the world’s largest bond fund, rose 4.8 percent in 2008, beating 93 percent of its peers, data compiled by Bloomberg show.

Mark Porterfield, a Pimco spokesman, has said the firm doesn’t comment on fund holdings.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aKzS8DTMYQbY&refer=home

[Incitatus]

1. Because he got them at firesale prices?

The people who paid full price got screwed, but if he is buying them at a fraction of the cost, he will make a killing when the market returns.

[Tuesday Afternoon]

2. Buy low. Sell high. --

Bet on the future.

[HamdenRice]

3. As I wrote in the thread you posted in, most of them are still good but banks can't buy them

There is a lot of hocus pocus going on trying to convince the public that all mbs are garbage or junk. That's just not true. The market for them has collapsed, but most of them are still paying out, and in present value models are worth a lot. Many are only in default because of technical "cross defaults."

Anyone who can buy these securities, and wait out the market collapse, is going to make a fortune -- all the while earning a very hefty income in interest. Apparently that's what this guy is doing.

[Joanne98]

4. Thanks. I just hope we all don't get our interest rates raised to 36%

two years from now!