Despite Default Risk, Select Muni Bonds Strong Buy: Gross

Regardless of the shabby state of government finances in the US, Pimco's Bill Gross says now is the time to be buying municipal bonds.

Bill Gross
Bill Gross

California and New York City are among the governments Gross, speaking in a CNBC interview, says will treat investors the best.

While he suggests avoiding entities with big budget shortfalls like Illinois, there are a number of other opportunities out there for investors trying to get better yields than the still-low returns that Treasurys provide.

"Despite the risk there's always the reward function, and you can get 6.65 percent in New York City Build America bonds, and 7 percent-plus in California," he said. "That's decent return relative to the admittedly higher risk these days."

Gross, who helps Pimco and its more than $1 trillion in assets under management run the world's largest bond fund, recently put up $5 million to buy shares of five municipal funds. Two are in California, where the company is located.

The move comes as investors in general are fleeing munis.

Municipals have lost 1.4 percent of their funds in the past three months and 0.5 percent in the past week alone, according to data from TrimTabs market research. Corporate bonds have been most popular, with 2.5 percent inflows over the past three months.

"Theoretically states have to balance their budgets, but they never do. They've been dependent on federal handouts...," Gross said. "Could or would states default? Not really."

While Congress is threatening to play hardballwith the states and cut off supplemental funding for educational programs and unemployment benefits, Gross says he doubts that would come to pass.

"They undoubtedly are dependent on some special legislation or some under-the-table benefits with Medicaid and with education programs going forward that the federal deficit will have to fund," he says. "Ultimately I think in 2011 I think we're going to see continued funding of the states."