Pimco’s Gross Bets on California Bonds

The world’s best-known bond investor has given a vote of confidence to California -- the state with the nation’s worst credit rating.

Bill Gross, managing director of Newport Beach-based Pacific Investment Management Co., bought $445,200 worth of Pimco California Municipal Income shares after their value declined in late April, according to recent Securities and Exchange Commission filings. The muni income fund buys bonds issued by state and local governments in California.

Gross did not return a call for comment. Mark McCray, who manages the Pimco California Municipal Income fund, said Monday that Pimco was optimistic that the state’s economy could benefit from the passage of twin measures in March authorizing up to $15 billion in “recovery” bonds and requiring a balanced budget.

“California has gone a long way toward addressing the issues that have gotten the state in so much fiscal trouble,” McCray said.

Gross, who manages the $76-billion Pimco Total Return fund -- the nation’s largest bond fund -- bought 34,000 shares of the closed-end California fund from April 21-26 at prices ranging from $13.06 to $13.10.

On April 22, the shares traded for 6.7% less than their underlying value -- a record discount for the fund, according to Bloomberg News’ data.

Closed-end funds typically trade at discounts to the underlying securities in the portfolio, but when those spreads are especially wide, value-oriented investors may sense bargains.

“Seven percent tax-free yield, a [roughly] 5% discount and Pimco management -- that about sums it up,” Gross said in an e-mail to Bloomberg News. For California residents such as Gross, income on muni bonds is generally exempt from state and federal taxes.

In Monday’s trading, the Pimco California Municipal Income fund rose 1 cent to $13.20 on the New York Stock Exchange.