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

"Any news can add $10 to those things in a heartbeat," said Balestrino in an interview from his Pittsburgh office, referring to GM bonds.

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 on May 5. Balestrino said he's banking on an increase in the bonds after the Detroit carmaker unveiled plans on June 7 to slash annual costs by $2.5 billion. Since the announcement, GM bonds are up 10 percent.

The cost cutting shows that "senior management takes this with utmost seriousness," said Balestrino, 50, who joined Federated Investors Inc. 18 years ago and has managed the Total Return fund since it opened in 1996.

Federated's fund is up 1 percent this year, trailing the 2.9 percent return of the Citigroup Treasury Index and beating the 0.4 percent advance of the S&P 500-stock 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 Motor Co. 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's $3 billion of 8.375 percent bonds due in 2033 is currently worth 84.5 cents on the dollar, down 20 percent from $1.05 as recently as Feb. 14. The bonds have rallied from a low of 71.5 cents since May 17, buoyed by GM's cost-cutting plan.

Bondholders may have lost as much as $32 billion this year on debt sold by GM and Ford, according to estimates last month by analysts from Deutsche Bank AG. GM owes bondholders about $105 billion.

"I'm bearish on GM," said Brett Hoselton, an auto analyst at KeyBanc Capital Markets in Cleveland, who has a "hold" rating on GM's stock. "They'll continue to lose market share."

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 loss of $1.1 billion, the biggest in its 97-year history.

Balestrino and fund co-managers Mark Durbiano, 45, Donald Ellenberger, 46, and Christopher Smith, 50, may get indirect help from billionaire Kirk Kerkorian, who said Tuesday that he had 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 chief executive G. Richard Wagoner Jr. would step up efforts to return the company to profit 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 Capital Group Cos. of Los Angeles, data compiled by Bloomberg show. Capital Group, Brandes Investment Partners LP and Southeastern Asset Management Inc. increased their GM holdings in the first quarter by a combined 64 million shares as the stock hit a 13-year low.

GM is the largest company ever to have 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 Corp. 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 Corp. and U.S. refiner Valero Energy Corp.

Toronto-based Barrick Gold, the world's third-largest gold producer, last month agreed to pay cash to raise its stake in Highland Gold Mining Ltd. to 20 percent from 14 percent. The decision will help Barrick Gold develop projects in Russia.

Valero in April agreed to buy Premcor Inc. for $6.9 billion in cash and stock to become the largest U.S. refiner as record prices for gasoline and other fuels boost profits. The decision prompted S&P to cut the San Antonio-based company's ratings to one level above junk and its bonds fell. Balestrino is unfazed.

"Their business has never been healthier," said Balestrino, who started his career as an environmental consultant studying nuclear power development while pursuing a master's degree in urban and regional planning from the University of Pittsburgh. "They're just printing money."