Pimco's Gross: Don't Jump Ship on Treasurys Now

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Bill Gross

The recent sell-off in U.S. Treasurys has pushed yields on the 10-year to 2.55 percent, and led many speculators to predict yields will hit a "new normal" of 3 percent.

But, the manager of the world's largest bond fund, Bill Gross said in his July newsletter that yields on the 10-year have risen too much and should actually be trading at 2.2 percent.

(Read More: Bond Investors Were 'in Denial')

Gross, the manager of Pimco's Total Return Fund said the U.S is much further away from a recovery than the Fed is currently predicting and the 2 percent inflation target is a "distant shore".

"Yields were too low and prices too high for both the investors' and the economy's good," he wrote in his letter to investors.

(Read More: Market Consensus: Get Ready for 3% Treasury Yields)

"We may have reached an inflection point of low treasury, mortgage and corporate yields in late April, but this is overdone," he added.

Gross's bullish views on Treasurys has cost his fund dearly. The Total Return Fund is down 3.79 percent so far this month and has declined 4.57 percent to $10.65, a low not seen since August 2008.

Investors have sold Treasurys after Fed Chairman Ben Bernanke signaled last week that the central bank will start "tapering" its bond purchases later this year.

(Read More: Treasury Yields Will Spike to 5%: Societe Generale)

Using the metaphor of a sinking ship, Gross wrote: "Without the presence of a "Bernanke Put" or the promise of a continuing program of QE check writing, investors found the lifeboats dysfunctional. They could only sell to themselves and almost all of them had too much risk. A band somewhere on the upper deck began to play "Nearer, My God, to Thee"."

—By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave