The US government will need to keep Treasurys yields as high as 4 percent in order to entice investors to buy them, Pimco co-CEO Bill Gross told CNBC.
Addressing the surging yields in government debt that have caused some to worry about inflationary pressures, Gross says foreign nations such as China cannot be counted on to fill orders for the $2 trillion or so in bonds the government will be auctioning off this year while buying only $300 billion or $400 billion.
"That's a big gap to fill," Gross said in a live interview from a Morningstar investment conference. "It's too big of a gap for the Chinese to fill, so that has to be filled by the Pimcos of the world and by the individual savers."
He said the government will have to keep yields at between 3.7 percent and 4 percent to provide investors with enough incentive to buy bonds instead of stocks or other asset classes.
And investors can get even better returns on Build America bonds, which are issuances from various government entities aimed at developing capital projects around the country.
The bonds are taxable securities tied to the government stimulus program. They qualify for a 35 percent rebate of financing costs, which actually makes them less expensive than tax-exempt financing otherwise available to state and local governments.
Some $10 billion of the bonds have been sold since February.
Investors will have to weigh such choices as the stock market struggles to regain its footing since falling off its historic highs in October 2007, Gross said.
"The Dow isn't going back to 14,000. We do think that corporate profits in terms of their margins will be half of what they were several years ago, that (price-to-earnings ratios) will be significantly lower than what we're used to," he said. "Putting all that together, it suggests that the stock market is one asset class (that) basically will be slow growing. It doesn't mean it has to go down or retest or any of those types of things. But it simply means the double-digit types of returns that investors are used to are a thing of the past."
He suggested investors stick with companies that have solid balance sheets, like Procter & Gamble and Coca-Cola.
"What we suggest is you should focus on companies that aren't part and weren't part of the levering (debt) process, that have stable dividend growth in their future," he said. "Not the high-flyers, the housing stocks. Those are sectors of the past that won't be part of the future."