The Federal Reserve will keep interest rates low for "three, four, or five years," which is why Pimco is jumping into mortgage-backed securitiesin a big way, the bond giant's founder and co-chief investment officer, Bill Gross, told CNBC Europe Friday.
"If the EU economies and the euro basically go down, the dollar goes up," he said. "It’s hard to see the Fed raising rates and thus reinforcing a higher and higher dollar making U.S. industries less and less competitive."
In addition, "next year the expectation is that if there is a QE-3, it will be mortgage-directed, and it would pay holders to load up on mortgages before the Fed does," said Gross, whose Pimco Total Return Fund is the world's largest bond fund.
Last week, Pimco said mortgage-backed securities now account for about 43 percent of the holdings of the Pimco Total Return Fund, as of the end of November.
Such securities were at the heart of the 2008 financial crisis, when a wave of mortgage defaults sent their value plunging and caused billions of dollars of losses for investors and many financial institutions.
Since then, investors have shunned the securities, which has caused a severe credit crunch and delayed a recovery in the housing market. The Fed has been forced to step in to buy up billions of dollars of mortgage-backed securities to help unfreeze that market.
Gross believes other central banks, including the the European Central Bank and the Bank of England, will be keeping interest rates low for another three to four years.
He downplayed a recent Morningstar report that the Total Return Fund has seen a big increase in redemptions, with $500 million in fund outflows in November, bringing the total cash outflow to $17 billion for the past 12 months.
"Gross's fund has underperformed this year and a lot of it goes back to his misplaced bet on Treasuries," Morningstar editorial director Kevin McDevitt said.
But Gross disputed Morningstar's numbers.
"Morningstar has their way of calculating," he said. The fund has been at "$244 or $245 billion for the last six months," he added. "How they calculate their outflows I'm not quite sure, but the fund itself is very stable and we could certainly provide those numbers if anybody would care to look at them."
In fact, Morningstar crunched the numbers again and put out a revision on Friday, saying the outflows from Pimco's Total Return Fund was actually $10.3 billion, not $17 billion as earlier reported.
He again noted his August "mistake" on betting heavily against the price of U.S. government debt.
"Three or four months ago we said, 'Point well taken,'" he said. "It is important to recognize in the last three months we shifted that position" and bought more Treasurys. "Yes, a mistake was made in the first part of year. In the second part of the year, 'Doing very well, thank you.'"
On the European debt crisis, Gross said he doesn't see the European Central Bank becoming the "lender of last resort" to struggling European nations anytime soon.
"We've waited for the ECB for a long time," he said, and it has made it clear it is "a central banker for banks, not a central bankers for countries."
The ECB wants the countries to solve their problems through the European Union, he added.
"They've been totally out of the marketplace," he said, although if there is an additional crisis — such as in Italy and Spain, which he considers vulnerable to insolvency —then "perhaps" the central bank might step in to buy sovereign debt.
"There were hopes three months ago that by this time all fiscal and monetary arrangements [in Europe] would be wrapped up," Gross said. "Now we see from the fiscal side at least that the 'grand plan' will take at least three to six months to resolve in terms of votes, and perhaps there’ll be another 'grand plan.'"
Things are better from the monetary side, he said, because the ECB has done "substantial help" in terms of providing liquidity, such as when in November it joined with the Fed, the Bank of England and several other central banks to make it easier for banks to get dollars if they need them.
"European banks are certainly in a better position in terms of liquidity but from the standpoint of sovereign solvency, I think we're sort of in middle ground still."
—Reuters contributed to this report.