PIMCO's Gross says muni bonds and TIPS "attractive"

By Ros Krasny

CHICAGO (Reuters) - Municipal bonds are among the best buying opportunities now as states line up for billions in federal aid from the incoming Barack Obama administration, said Bill Gross, chief investment officer of the giant bond firm PIMCO.

Other strategies offered by Gross in his January investment newsletter were buying Treasury Inflation Protected Securities (TIPS) and certain investment-grade corporate bonds.

By contrast, in the Treasury market, "low yields offer little reward and increasing risk," given ballooning federal budget deficits, he said.

Gross noted that requests for aid from municipalities and states total nearly $1 trillion "and to think California or New York City would be allowed to fail is, well -- unthinkable."

"Municipal bonds ... selling at historically high ratios relative to U.S. Treasuries, offer attractive price appreciation potential, or at the very least a defensiveness with high carry that a 2 1/2 percent 10-year Treasury cannot," Gross said.

According to Municipal Market Data, top-rated 30-year munis now yield 161 percent and 10-year munis yield 133 percent of comparable Treasuries.

Triple A rated munis started 2008 yielding a more normal 85 percent of 30-year Treasuries and 79 percent of 10-year government bonds.

Meanwhile, Gross said he doubted the U.S. economy was in for the type of deflation that markets are forecasting, making TIPS a good buy.