Investors can realize strong returns on municipal bonds and federally-instituted Build America Bonds (BABS), Pimco founder and co-CIO Bill Gross told CNBC Friday.
Gross said that some muni bonds are yielding more than 6 percent and that BABSthis week offered investors 2 percent more than Treasurys.
Ten- and 30-year Treasurys were yielding 3.20 percent and 4.076 percent respectively this week.
"You've always got to turn on the lights, you've always got to use some water," said Gross. "The L.A. department of water and power [bonds] came in at 6 percent plus.
"They are a double-A bonds and the type that a retail investor can really buy. They can call up their broker and say, 'Give me some of those Los Angeles DWAP (Department of Water and Power) bonds.' "
Gross added that investing in BABS bonds has a philanthropic aspect, as it's helping the issuers rebuild and maintain their communities. The bonds are available throughout the country.
Aside from muni bonds, "Every investor today should have a list of names [of companies] to buy when the deleveraging takes its next toll on the market, because what happens in a deleveraging world is that both the good and the bad get contaminated," said Pimco co-CIO and CEO Mohamed El-Erian.
He added that large US multinationals, "with large cash cushions that have termed out their debt are going to come bouncing back," especially those that sell to China.
El-Erian was talking about investing in (corporate) bonds, but said he would also include some stocks.
The list, he said, should include countries with strong fundamentals, such as Brazil and China, that are going to get hit in a deleveraging mode, and the bonds of solid companies in the financial sector. El-Erian added: "They [financial sector companies] are going to be impacted by the deleveraging, but they offer value."
“What’s driving the market bonkers,” Pimco Managing Director Paul McCulley told CNBC Friday, is the uncertainty of next steps for the euro and the European Union—either an end to the currency or a move toward fiscal federalism on the continent.
McCulley, who heads the firm's short-term bond trading desk, was quick to point out that, “It doesn’t have to be a case of dissolution of the monetary union. You can actually have fiscal federalism.”
McCulley said the European crisis is a case of the northern European countries, led by Germany, bailing out the southern ones, and it’s not a long-term solution. Pimco is the world's largest bond investor.
“It’s very similar to making a loan to your unemployed brother-in-law,” he added. “You really don’t want to do it, but if you don’t, he’s going to move into your recreation room.”
He said eventually the north will tire of pumping money into the south and that could lead to a restructuring of the south.
McCulley also said the US Treasury market is a “call option on Armageddon.
"I don’t think Armageddon is going to happen, but it’s more likely than it was a week ago.”
He added that Pimco isn’t buying Treasurys now because it has enough and doesn’t need more.
Tony Crescenzi, a senior vice-president at the firm, said Treasurys could be a good investment for equity investors, with this caveat.
“Considering Treasurys now,” he explained, “[you need to think about] the equity exposure you have in various assets and consider whether that would be a good insurance premium.”
Pimco's Chuck Lahr, head of the firm's new equity division, said he expects trading to be "choppy" through the summer. "Traders are [now] taking advantage of short-term dislocations in the market, picking up some cheap merchandise in short-term trades."
He said the European equities markets, now trading at a 30 percent discount, offer value for the investor. Areas to look to are exporters and consumer staples, such as food and drink.
"A lot of the exporters are in Germany, and their generosity may be rewarded," he said. "Beyond that, people are going to continue to eat and drink, and a lot of these names in Europe have been sold off rather savagely. They're prodigious free cash-flow generators."
Lahr added that what's going on in Europe now (the ECB and IMF bailout plans) is equivalent to TARP in the US.