UPDATE 1-Pimco raised U.S. government-related holdings in May

Tue Jun 10, 2014 6:38pm EDT

(Adds Gross comments and more asset-allocation shifts; byline)

By Jennifer Ablan

June 10 (Reuters) - Bill Gross, who runs the world's biggest bond fund at Pacific Investment Management Co, raised his holdings of U.S. Treasuries and government-related debt in May on a bet the Federal Reserve will keep interest rates low for longer than expected.

Gross's Pimco Total Return Fund, with $229 billion in assets, had 50 percent of its assets in U.S. government-related holdings in May, up from 41 percent the previous month, according to Pimco's website on Tuesday.

Pimco is owned by Allianz S.E., a leading global diversified financial services provider.

Last week, Gross said the firm believes the "new neutral" inflation-adjusted federal funds rate will be close to 0 percent as opposed to 2 percent to 3 percent in prior decades.

"If 'The New Neutral' rates stay low, it supports current prices of financial assets," Gross said in his latest investment letter. "They would appear to be less bubbly."

Pimco, which manages $1.94 trillion in assets, introduced its new-neutral outlook in May. New neutral suggests the global economy is transforming from a post-financial crisis recovery period called the New Normal in 2009, toward stability characterized by modest economic growth over the next three to five years.

Pimco's U.S. government-related category may include nominal and inflation-protected Treasuries, Treasury futures and options, agencies, FDIC-guaranteed and government-guaranteed corporate securities, and interest rate swaps.

Gross's move into U.S. government-related securities also comes as the Pimco Total Return fund's cash equivalents and money-market securities showed negative 9 percent in May, from 5.0 percent in April.

In having a so-called negative position in cash equivalents and money-market securities, it is an indication of using derivatives and short-term securities as collateral in order to boost the fund's buying power with leverage.

Gross is not alone in his rates view. Jeffrey Gundlach, chief executive officer of DoubleLine Capital LP, a major Pimco rival, said on Tuesday that the 10-year U.S. Treasury note will likely be in a range between 2.20 percent and 2.80 percent during the second half of year.

The Pimco Total Return Fund, meanwhile, increased its mortgage holdings to 22 percent in May from 19 percent in April, while reducing its U.S. credit holdings to 11 percent in May from 12 percent in April.

The Pimco Total Return Fund had 13 percent of its assets in non-U.S. developed markets last month, up from 11 percent in April, while the fund had 8 percent in emerging markets last month, up from 7 percent in April.

"Commonsensically it seems to me that the more finance-based and highly levered an economy is, the lower and lower real yield levels must be in order to prevent a Lehman-like earthquake," Gross said.

"If the price of money is the basis for an economy's prosperity - and it is increasingly so in developed global economies - then central banks must lower the cost of money to maintain that prosperity - and keep it low." (Reporting by Jennifer Ablan in New York; Editing by Chris Reese and Lisa Shumaker)