UPDATE 1-Gross urges slow pace of deficit cuts-Reuters Insider

(Adds detail on congressional talks starting Thursday and
Gross comments on U.S Treasuries and the ECB)

NEW YORK, March 3 (Reuters) – Bill Gross, co-chief
investment officer of PIMCO, the world’s biggest bond fund
manager, on Thursday urged U.S. lawmakers to cut the massive
federal deficit but not so swiftly as to choke off the nascent
U.S. economic recovery.

Speaking exclusively to Reuters Insider, Gross said: “Let’s
cut the deficit, but let’s do it gradually,” so that real
economic growth can take hold.

Lawmakers struck a deal on Wednesday that delays for two
weeks a showdown over the current year’s spending plan.
Republicans are seeking some $61 billion of cuts to help reduce
the deficit, estimated to hit $1.65 trillion this year, but
Senate Democrats are preparing a measure that would keep
funding essentially flat.

The first negotiations on the budget are expected to take
place on Thursday, according to congressional aides.
Wednesday’s deal averted a government shutdown as funding for
daily operations had been due to expire on Friday, March 4.

Gross, who oversees $1.2 trillion of assets at the Newport
Beach, Calif.-based, investment management firm, said he does
not expect a credible deficit reduction plan until after the
2012 elections.

Addressing the risk to markets from the mushrooming budget
deficit, Gross said U.S. Treasuries are moving toward being
“less of a triple-A credit,” echoing a concern many bond
investors have how long the United States can retain the
highest possible rating designated by credit rating agencies.

Gross, who has been avoiding U.S. government debt
securities recently, said he suspects the yield on Treasuries
will move higher this summer after the Federal Reserve brings
an end to its $600 billion Treasury purchasing program.

In a more normal environment, the yield on benchmark U.S.
10-year notes (US10YT=RR: Quote, Profile, Research) would more closely track the nominal
rate of gross domestic product growth, which Gross estimates to
be roughly 5 percent.

A yield that high is not likely in this environment, but a
4.0 percent yield for 10-year notes is a “rational expectation”
if the Fed “disappears as the buyer of last resort,” Gross
said. The note currently yields 3.56 percent.

Turning his attention away from the U.S. situation, Gross
saw European Central Bank President Jean Claude Trichet’s
comments Thursday on the inflation threat in the euro zone as
signalling a near-term rate hike but not the beginning of a

Trichet’s use of the term “strong vigilance” following the
ECB’s monthly policy meeting was “tough talk, there’s no doubt
about it,” Gross said.

The ECB left benchmark rates for the region unchanged at a
record low 1.0 percent. Gross said he now expects 25 basis
points of increase thanks to high prices for oil and other
commodities, which feature more prominently in the ECB’s
inflation math than in the Fed’s.

Still, Gross said sufficient headwinds remain in the euro
zone recovery to prevent any near-term rate increase from
becoming a trend any time soon.
(Reporting by Dan Burns, Jennifer Rogers and Jennifer Ablan)