RPT-UPDATE 1-PIMCO's Gross bought Thornburg paper-CNBC

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NEW YORK, March 7 (Reuters) - The manager of the world's biggest bond fund said on Friday he had bought hundreds of millions of dollars of Thornburg Mortgage Inc's TMA.N debt in the last few days.

Bill Gross, chief investment officer of Pacific Investment Management Company, or PIMCO, said on CNBC television he has been buying "high-quality" rated Thornburg paper with yields in the "9, 10, 11 percent range." Gross manages the $120 billion PIMCO Total Return Fund.

"Ultimately, we expect the paper that we're buying to ... provide close to double-digit-type returns," Gross said.

Thornburg shares have plummeted more than 60 percent over the last two days on worries that the "jumbo" mortgage lender might go bankrupt after its failure to meet a margin call triggered defaults under lending agreements.

Gross said the Federal Reserve's term auction facility, which the Fed on Friday said it would increase, would help ease credit conditions somewhat.

"What really needs to be done is for the Fed to lower long-term mortgage rates," he added.

"We still have a Fannie Mae conventional mortgage of 5.75 percent, which means 6.25 percent and 7 percent-plus for jumbos," he said.

"The housing market cannot be supported with those types of yields," he said. Gross said "the Fed needs to, in effect, buy the mortgage market," he said."

The Fed can buy upwards of $100 billion of mortgage paper, Gross said, which he likened to Operation Twist in the early 1960s, when the Fed sought to raise short-term rates to protect the dollar but lower long-term rates to stimulate domestic investment.

"The Fed has a huge balance sheet and they can exchange Treasury securities for mortgage securities simply by selling Treasuries and buying mortgages," Gross said. (Reporting by John Parry and Jennifer Ablan; Editing by Jonathan Oatis)