Jan. 29 (Bloomberg) -- Bill Gross, manager of the world's biggest bond fund, said the $150 billion fiscal stimulus plan being considered by Congress will be of ``marginal benefit'' to the U.S. economy.

Lawmakers should be developing incentives that spur demand rather than offering a combination of rebates for individuals and tax breaks for businesses, Gross said in a commentary today on Pacific Investment Management Co.'s Web site. Productivity in the U.S. economy depends on innovation and investment, measures lacking from the proposal, he said.

As the economy has come to rely on consumption to fuel growth, a stimulus package that stokes personal spending ``only makes sense in the short term as a life preserver,'' Gross said. ``Public works programs, badly needed infrastructure repairs, as well as spending on research and development projects should form the heart of our path to recovery.''

Approaches to monetary policy must also change, Gross said. The Federal Reserve risks creating a bubble again in markets such as housing if policy makers push borrowing costs back near the 1 percent level reached in 2003. Gross said last week he expects the Fed to drop its target rate for overnight loans between banks, now 3.50 percent, as low as 2.50 percent.

Bush Backs Stimulus

President George W. Bush, delivering his final State of the Union address last night, urged Congress to set aside election- year politics and act quickly on the stimulus plan. He warned lawmakers against altering the compromise reached after extensive bipartisan negotiations.

Senate Democrats are already proposing changes to the plan negotiated with House Speaker Nancy Pelosi, a California Democrat, and Republican leader John Boehner, an Ohio Republican. Significantly altering the proposal ``would delay it or derail it, and neither option is acceptable,'' Bush said.

Gross's $112.7 billion Total Return Fund earned 12.5 percent in the year through yesterday, outperforming competitors in the intermediate bond fund category, according to data from Morningstar, the Chicago-based research firm.

Gross has predicted since September 2006 that the Fed would lower borrowing costs and was bullish on Treasuries. The central bank cut rates for the first time in four years this past September.

More Company Debt

Earlier this month Gross said yields on government debt were ``not attractive'' and that he was looking to buy ``anything but Treasuries.''

Gross has more investment-grade company debt than he's had in four years. The Total Return Fund, the world's largest fixed- income fund, had 13 percent of its assets in corporate bonds in December, up from 12 percent the previous month, according to data on the Newport Beach, California-based firm's Web site.

``We're talking about almost too-big-to-fail types of institutions,'' Gross said in an interview last week with Bloomberg Television. ``We're moving down from the highest quality Treasury spectrum to agency-backed mortgages as well as bank capital.''

Current spreads of about 200 basis points over Treasuries make bonds sold by financial firms such as New York-based Citigroup Inc., Bank of America Corp. and Wachovia Corp., both based in Charlotte, North Carolina, appealing, he said.

Ten-year Treasury yields rose for a second day to 3.65 percent. Yields on two-year notes, more sensitive to changes in monetary policy, rose to 2.27 percent.

Treasuries of all maturities have returned 2.7 percent since Jan. 1, the best beginning of a year since 1988, according to an index compiled by Merrill Lynch & Co.

Gross runs the Total Return Fund for Pimco. The firm, a unit of Munich-based insurer Allianz SE, manages about $744 billion.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

Last Updated: January 29, 2008 11:54 EST