4 Highlights of Bill Gross's Morningstar Speech

There will be no QE3, he says.

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Bill Gross, manager of the world's largest bond fund, PIMCO Total Return, delivered the opening keynote address to the 2011 Morningstar Investment Conference in Chicago. He spoke on a wide range of topics, including the outlook for treasury bonds and whether the Federal Reserve will pursue a third round of quantitative easing. Here are four takeaways from his speech:

Avoid treasuries. With real interest rates—yields after factoring in the current inflation rate—at negative levels, investors risk seeing their returns eroded by inflation for possibly years to come. Gross made it clear that he didn't foresee a huge sell-off or a "debacle" in the treasury market, because countries like China will continue to buy treasuries. But he reiterated that PIMCO's flagship fund, PIMCO Total Return (symbol PTTAX), owns no treasuries, even as that asset class continues to rally.

[See Why Treasury Yields Are Falling.]

Look outside the United States. U.S. government debt only makes up about half of the entire bond market, Gross said. He mentioned a handful of other countries outside the United States that offer more attractive yields, including a combination of emerging and developed nations like Brazil and Canada. He acknowledged that more risk comes with investing in other countries.

[See 50 Best Funds for the Everyday Investor.]

There will be no more bond-buying programs. Gross believes the Fed will not initiate a third round of quantitative easing after the second round—commonly referred to as "QE2"—ends at the end of June. He says the members of the Fed are too divided. Instead, he thinks the Fed will keep repeating the "extended period" language it has used since March 2009. The Fed has repeated in every statement since then that it plans keeping interest rates at virtually zero, where they've been since December 2008, for "an extended period." In place of a third round of asset purchases, Gross said: "The Fed's language will be the new QE3."

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Buy dividend-paying stocks. While acknowledging that it was odd for a bond-fund manager to recommend buying stocks, Gross told the audience that many large, multinational U.S. companies offer attractive yields, especially if bond yields stay near record lows. He cited companies like Coca-Cola, Proctor & Gamble, and Johnson & Johnson as examples.

Twitter: @benbaden