The debt crisis and central bank policy responses have degraded the quality and value of debt markets and signal a "potential breaking point" in the global economy, PIMCO's Bill Gross, manager of the world's largest bond fund, said in his monthly letter to investors.

In his June outlook entitled "Wall Street Food Chain," Gross said stimulus policies by the Federal Reserve and the European Central Bank have led to riskier government bonds with lower value and paved the way for higher inflation.

"Policy responses by fiscal and monetary authorities have managed to prevent substantial haircutting of the $200 trillion or so of financial assets that comprise our global monetary system, yet in the process have increased the risk and lowered the return of sovereign securities which represent its core," Gross said.

"Both the lower quality and lower yields of previously sacrosanct debt therefore represent a potential breaking point in our now 40-year old global monetary system," he added.

Gross oversees the PIMCO Total Return Fund, which has assets of $258.7 billion, and shares the co-chief investment officer title with Mohamed El-Erian. Overall, Pacific Investment Management Co. oversees more than $1.77 trillion in assets.

Gross said investors should seek higher-quality sovereign bonds in the U.S., Mexico, and Brazil with intermediate durations and stocks of global companies with stable cash flow that are "exposed to high-growth markets."

He also warned that the higher risk and lower quality of U.S. Treasuries could spur investors such as China and firms like PIMCO to drop them for more profitable investments such as commodities and real assets, a move that could disrupt the "current dollar-based credit system."

"This transition continues to point towards higher global inflation as a solution to overextended debt-ladened balance sheets - be they public or private," Gross said.

Gross also addressed the potential for inflation and the abundance of "easy" credit in his May outlook, entitled "Tuesday Never Comes."

On Thursday, Gross told CNBC that declining interest rates on U.S. Treasuries benefit the younger generation while putting the older generation at a disadvantage.

Gross said that the effect is ultimately "bad," and added, "If you can't satisfy both sides, then ultimately the credit markets themselves are dysfunctional."

Gross also said China, the largest foreign holder of U.S. Treasuries, could become disenchanted with the tumbling yields and invest elsewhere.

"At a 1.57 percent yield for Treasuries on the 10-year level, you'd have to think they're looking for other alternatives" such as commodities or oil, he said.

Gross also said that he doesn't expect a common euro bond to be issued, but that such an event would stifle demand for Treasuries and could raise 10-year U.S. Treasury yields to 2.5 to 3 percent.