Joseph Balestrino, manager of the Federated Total Return Bond Fund, expects his $30 million bet on General Motors' bonds to help his fund...

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Joseph Balestrino, manager of the Federated Total Return Bond Fund, expects his $30 million bet on General Motors’ bonds to help his fund overcome a slow start in 2005 and beat his performance benchmarks.

GM bonds repayable in 2033 lost about 25 percent of their value in the two months before Standard & Poor’s lowered the company’s credit rating to junk May 5.

Balestrino said he’s banking on an increase in the bonds after the Detroit-based carmaker unveiled plans June 7 to slash annual costs by $2.5 billion.

Since the announcement, GM bonds are up.

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The cost cutting shows “senior management takes this with utmost seriousness,” Balestrino said.

Federated’s fund is up nearly 1 percent this year, as of June 15, trailing the 2.9 percent return of the Citigroup Treasury Index and beating the 0.4 percent advance of the S&P 500 Index, including reinvested dividends.

During the past five years, the fund rose at an annual rate of 7.2 percent, matching the gain of the Citigroup Treasury Index and outperforming the 2.4 percent slide of the S&P 500.

About 3 percent of the $1.4 billion fund’s assets are in bonds of GM and Ford.

In all, junk bonds account for less than 10 percent of the fund’s holdings.

About 37 percent was allocated to corporate bonds, 29 percent to mortgage-backed securities and 21 percent to Treasury and other U.S. government bonds, as of April 30.

GM is shedding more than 25,000 U.S. manufacturing jobs and closing an unspecified number of assembly plants after the company reported a first-quarter net loss of $1.1 billion, the biggest in its 97-year history.

Balestrino and co-fund managers Mark Durbiano, Donald Ellenberger and Christopher Smith may get indirect help from billionaire Kirk Kerkorian, who said June 14 that he almost doubled his stake in GM to 7.2 percent of the company’s outstanding stock since early May.

Kerkorian’s presence prompted speculation that CEO Rick Wagoner would step up efforts to return the company to profitability after the first-quarter loss and a 6.7 percent drop in U.S. auto sales this year.

The billionaire becomes the third-largest GM shareholder after State Street Corp. of Boston and Los Angeles-based Capital Group, data compiled by Bloomberg show.

GM is the largest company ever to see its credit rating cut to below investment grade.

Standard & Poor’s reduced GM’s credit rating two levels to BB from BBB- on May 5. Ford was cut by one level to BB+ from BBB-.

GM’s short-term bonds “have been trading more at ‘CCC’ price levels,” Balestrino said, indicating why he sees value in the securities. His fund is holding GM and General Motors Acceptance bonds that mature from 2005 to 2033. Most of his Ford bonds mature in the next two years.

Since the end of December, the fund has boosted its allocation to corporate bonds and reduced its cash position on expectations for improving earnings, Balestrino said.

The Federated fund’s investment-grade bond investments include Canadian gold miner Barrick Gold and U.S. refiner Valero Energy.