Bill Gross
Courtesy: Bill Gross
By Catherine Dunn
December 5, 2013

It wasn’t the year for bonds. Says Bill Gross, manager of Pimco’s massive Total Return Fund: “When the Fed hinted that some day quantitative easing would end” — causing interest rates to jump 1% — “everybody rushed for the door.” Gross shared his thoughts on the future (edited excerpts).

What he expects in 2014

“A continuation of current Federal Reserve policies: easy money, low policy rates. That may not necessarily be a good thing in the long run, but in the short run for bond investors it probably means a year in 2014 of relative stability, in which investors get to earn their coupon and don’t have to worry so much about a bear market.”

Where he’s investing his own money

“This is an ideal environment to borrow money, when short-term rates are 1% to 2%, and lend at higher yields. The way to do that is through closed-end funds. These are the ones I’ve been buying for my personal account. Invesco Municipal Opportunity Trust: (VMO) Municipals, such as Puerto Rico and Detroit, induce a lot of near-term volatility sometimes as investors get afraid. But this fund has a relatively high-quality portfolio. I like it for its yield (7%, tax-free), and I like it because you can get in and out pretty quickly. BlackRock Build America Bond Trust: (BBN) The yield is 8.6%, and most of the bonds are single-A and in many cases double-A. So it’s not a junk fund. It is taxable. The only negative is the long maturity. You are investing in a 30-year bond, but it’s got a great yield. Pimco Corporate and Income Opportunity Fund: (PTY) I manage this one. It’s sort of the same cut as the BlackRock fund. It yields 8.6%, and it’s relatively high quality. The advantage here is a much shorter average maturity — about five years.”

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This story is from the December 23, 2013 issue of Fortune.

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