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PIMCO's Gross raises Treasuries in flagship fund

By Jennifer Ablan

NEW YORK (Reuters) - Bill Gross, the manager of the world's largest bond fund, has soured further on the economic outlook and has jacked up buying of U.S. Treasuries in June, according to PIMCO's website on Tuesday.

Gross' $243 billion Total Return Fund held 8.0 percent in U.S. Treasuries and Treasury-related securities as of the end of June 30, up from 5.0 percent as of the end of May -- a 60 percent increase.

The "Government Treasury" classification in Gross' flagship fund includes holdings of U.S. Treasury notes, bonds, futures and inflation-protected securities, Pacific Investment Management Co said.

Gross, who also helps oversee $1.2 trillion in assets as co-chief investment officer at PIMCO, told Reuters in early May that the only way he would purchase Treasuries in a big way again is if the United States headed into another recession.

U.S. job growth ground to a near halt in June as employers hired the fewest workers in nine months, frustrating hopes the United States would bounce back quickly from a slowdown in the first half of the year.

FOLLOW THE FALLING YIELDS

In the May interview, Gross had said: "Treasury yields are currently yielding substantially less than historical averages when compared with inflation. Perhaps the only justification for a further rally would be weak economic growth or a future recession that substantially lowered inflation and inflationary expectations."

Against the backdrop of the recent employment report as well as the spiraling European debt crisis, the yield on the benchmark 10-year Treasury note fell to 2.91 percent on Tuesday, down 1.4 basis points from late Monday. It touched 2.82 percent in overseas trading earlier on Tuesday, which was the lowest level since early December.

PIMCO's representatives said they do not comment on holdings.

Gross also recently tweeted that the Federal Reserve would hint at a third round of bond purchases, or QE3, at the Jackson Hole meeting in August. In that regard, he said the front end of the U.S. Treasury yield curve represents the best value on a duration-adjusted basis.

Gross' bearishness on the United States was also evident in the Total Return fund's increase in non-U.S. debt.

Gross increased the portfolio's stake in non-U.S. debt in June for a second consecutive month to 13 percent from 10 percent. Meanwhile, cash and cash equivalents dropped in June to 29 percent from 35 percent.

As of June 30, Gross' Total Return Fund held a negative 9.0 percent short position in the newly created investment category referred to as swaps and "liquid rates," which includes U.S.-dollar-denominated interest-rate swaps, swaptions, options and other derivatives. That position was unchanged from May.

Gross made headlines earlier this year and came under heavy criticism when it appeared he had ramped up a "short" position in U.S. Treasuries, given the furious rally in the debt securities.

But in May, it was revealed that PIMCO had been short swaps. Swaps are an agreement between two parties to receive a fixed rate of interest and pay a floating rate (three-month LIBOR).

(Reporting by Jennifer Ablan; Editing by Jan Paschal)

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