Gross prefers swaps to Tsys under "do-nothing fed"

NEW YORK (Reuters) - Bill Gross, manager of top bond fund Pimco, on Wednesday said he prefers owning two-year swaps over two-year Treasury notes, given his belief that the Federal Reserve will keep interest rates unchanged for the rest of the year.

The Fed held its key interest rate steady at 2 percent on Wednesday but voiced greater concern about inflation, taking a step down a road that could lead to higher borrowing costs.

"Two-year swaps yield 3.73 percent versus 2.83 percent for Treasuries," Gross told Reuters via e-mail. "With 'rolldown,' two-year swaps should return 4-percent-plus under a 'do-nothing Fed," he added.

Gross, who manages the $130 billion Pimco Total Return fund, said he prefers owning securities at the short end of the curve because they are "controlled by the Fed."

"The back-end (of the yield curve) is susceptible to deleveraging as levered holders of duration are forced to reduce their value at risk."

(Editing by Dan Grebler)