Bill Gross, manager of the world's largest bond fund, ramped up buying of mortgage-backed securities in September on the likelihood the Federal Reserve's reinvestment program in those securities will boost prices significantly.

Gross increased mortgage debt to 38 percent of assets in his $242 billion PIMCO Total Return Fund

in September, from 32 percent in August, as the U.S. central bank announced last month that it will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.

PIMCO's latest bet on mortgages isn't going unnoticed.

Gross, who helps oversee $1.2 trillion as co-chief investment officer at PIMCO, made headlines earlier this year and came under heavy criticism when the manager widely known as the bond king bet heavily against U.S. Treasuries -- one of the biggest outperformers of this year.

His move into mortgage-backed securities also comes as the PIMCO Total Return fund's cash equivalents and money-market securities fell to negative 19 percent September, from negative 9 percent in August.

In having a so-called negative position in cash equivalents and money-market securities, it is an indication of derivative use and short-term securities being put up as collateral as a way to boost leverage and increase the fund's holdings in bonds with longer maturities such as mortgage-backed securities, Treasuries and corporate bonds, according to Eric Jacobson, director of fixed-income research at Morningstar who has covered PIMCO for more than a decade.

Over the years, some analysts in the fixed-income world have pointed out that Gross' use of derivatives to boost leverage and exposure to higher-yielding assets is what distinguishes the Total Return Fund from an ordinary plain vanilla bond fund.

One very basic thing to know, too, is that PIMCO classifies anything with a duration of one year or shorter as cash -- regardless of sector, Jacobson added.

Jacobson said after careful examination of the PIMCO fund's effective duration of 7.14 years -- about double over the last six months -- it doesn't necessarily mean PIMCO raised their pure interest-rate risk to the United States. They didn't double down on Treasuries.

Rather, PIMCO took on loose interest rate risk to other credit and government markets, he said, noting that the Total Return fund increased exposure in non-U.S. developed and emerging markets securities in September.

Duration is a bond's sensitivity to interest rate fluctuations, and going longer duration is an investment strategy when rates are expected to remain low or drop further and vice versa.

All told, the PIMCO Total Return fund's bad call on Treasuries earlier this year has cost it.

It is up only 1.06 percent year to date versus the benchmark BarCap U.S. Aggregate Index which is up 3.99 percent. But on a three-year basis, the fund is up 10.14 percent against the benchmark's 9.36 percent returns. The fund has also held up well over the last five years, with the fund up 7.80 percent versus the BarCap's 5.48 percent returns.

(Reporting by Jennifer Ablan; Editing by Matthew Goldstein and Andrew Hay)