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By Wes Goodman

June 9 (Bloomberg) -- Pacific Investment Management Co., which runs the world’s biggest bond fund, said the economic outlook “looks bad” for most of the world and central banks will refrain from raising interest rates.

“Rate hikes will be some time in coming,” Andrew Balls, a managing director for the company in London, wrote in a report on the company’s Web site.

Signs of recovery in economies around the globe point to a slower pace of decline rather than recovery, Balls wrote. The outlook over the next three to five years is for “weaker global growth and especially weaker growth in the developed countries,” he wrote.

The report helped ease speculation the Federal Reserve is moving closer to raising rates, bringing a pause to the biggest surge in U.S. two-year yields in eight months. Fifteen of the 16 U.S. primary dealers that trade with the Fed surveyed by Bloomberg News said they don’t expect the central bank to raise the target rate for overnight loans between banks this year.

Officials at the 16th, Cantor Fitzgerald & Co., weren’t immediately available to provide a forecast in the survey yesterday.

Two-year yields, among the most sensitive to the Fed’s interest-rate policies, climbed 44 basis points over the past two days as traders added to bets that the Fed will increase borrowing costs. The yield was little changed today at 1.38 percent as of 12:49 p.m. in Tokyo, near a seven-month high, according to BGCantor Market Data.

Krugman Optimism

The U.S. economy probably will emerge from recession by September, Nobel Prize-winning economist Paul Krugman said yesterday in London. U.S. job and manufacturing losses both slowed in May, government and Fed figures show.

Traders see a 62 percent chance the Fed will raise its target rate by its November meeting, based on futures on the Chicago Board of Trade. The odds were 26 percent a week ago.

The U.S. economy isn’t recovering fast enough from its steepest recession in 50 years to justify higher rates, said Takashi Yamamoto, chief trader in Singapore at Mitsubishi UFJ Trust & Banking Corp., part of Japan’s biggest bank.

“Short-end yields are too high,” Yamamoto said. “The Federal Reserve will not hike interest rates.”

Target Rate

The Fed reduced the target rate to a range of zero to 0.25 percent in December, seeking to stabilize a ballooning financial crisis.

The turmoil, which started with the collapse of the U.S. property market in 2007, has triggered more than $1.47 trillion of writedowns and credit losses at banks and other financial institutions, according to data compiled by Bloomberg, sending the global economy into its first recession since World War II.

Bill Gross, manager of Pacific Investment Management Co.’s $157 billion Total Return Fund, reduced his holdings of mortgage debt to the lowest in a year.

Pimco’s co-chief investment officer cut the holdings to 61 percent in May from 64 percent in April, according to the Newport Beach, California-based company’s Web site. Gross also reduced his holdings of government-related debt to 25 percent. Pimco is a unit of Munich-based Allianz SE.

All over the world, Pimco is focusing on assets that generate income instead of capital gains, Balls wrote.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.