The Bill Gross-managed Pimco Total Return fund reaped a $1.7bn payday following the US government's takeover of home loan groups Fannie Mae and Freddie Mac.
While shareholders in Fannie and Freddie suffered deep losses, the world's biggest bond fund saw its highest ever one-day rise against its benchmark index on Monday, benefiting from the huge bet made by Mr Gross on mortgage bonds issued by the agencies.
Over the past year, Mr Gross had made a shift out of US Treasuries and corporate bonds into agency bonds, betting that the government would support Fannie and Freddie. "We had 69 per cent in mortgage debt this morning, we had continued to build the position . . . We felt confident that the Treasury would have to act," he told the Financial Times.
Mr Goss expected mortgage bonds would tighten by another 25 basis points in coming days, which he said would boost his fund further. Only 20 per cent of the fund was in mortgage debt at the start of last year. Mortgage-backed bond prices rose after the US government seized control of the agencies.
Mr Gross's fund, which side-stepped the housing market slide, had risen strongly before Sunday's government bail-out. In the 12 months to August 1, the fund returned 9.2 per cent, beating all its peers, according to Morningstar, the fund tracker.
On Monday, the fund rose by 1.3 per cent, or $1.7bn, its biggest one-day rise against the Lehman Aggregate Bond index.
Mr Gross, who co-founded Pimco and has managed the Total Return fund since 1987, was one of the first to call for a bail-out of Fannie and Freddie.
In his latest monthly commentary, he also said that the government needed to use more of its own money to support financial markets, or risk a "financial tsunami".
Mr Gros said yesterday: "We're still in the mode of buying the highest-quality securities."
His style is to take a macro-economic view and make tactical changes based on short-term movements in the economy.
The recent success of the Total Return fund has helped Pimco to be the only one of the 25 largest mutual fund managers to lift its assets under management in the year to date, according to Financial Research Corporation data to the end of July.
