UPDATE 1-Pimco Total Return cut U.S. govt debt to 47 pct in June

Thu Jul 10, 2014 6:45pm EDT

(Adds more details on Pimco flagship fund and Pimco no comment; byline)

By Jennifer Ablan

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

Gross's Pimco Total Return Fund, with $225 billion in assets, had a still-high 47 percent of its assets in U.S. government-related holdings in June, down from 50 percent the previous month, according to Pimco's website on Thursday.

But notable is Gross's move to increase the Pimco Total Return fund's cash equivalents and money market securities, which showed negative 11 percent cash position in June, compared with negative 9 percent in May.

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

At the moment, Gross's action does not look risky with interest rates remaining at stubbornly low levels as Federal Reserve officials last month indicated they are in no hurry to raise the central bank's benchmark short-term interest rate.

A spokesman for Pimco, which is owned by Allianz SE , a global diversified financial services provider, declined to comment on sector holdings.

In June, 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.

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, to 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.

The Pimco Total Return Fund, meanwhile, kept its mortgage holdings unchanged in June at 22 percent, while slightly increasing its U.S. credit holdings to 12 percent in June, from 11 percent in May.

The Pimco Total Return Fund had 16 percent of its assets in non-U.S. developed markets in June, up from 13 percent the previous month, while the fund had 9 percent in emerging markets, up from 8 percent the previous month.

The Pimco Total Return Fund posted $4.5 billion in net outflows for June, its 14th straight month of investor withdrawals despite an improving performance.

The outflow streak continued despite the fund's 0.37 percent gain in June, which beat 88 percent of peers, according to Morningstar. That said, the fund was up 3.48 percent for the year and trails 74 percent of its peers. (Reporting By Jennifer Ablan; Editing by Diane Craft and Steve Orlofsky)

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