Higher unemployment, slow global growth and persistent government intervention in financial markets and companies will become the new normal for world economies, the chief executive of top bond fund Pimco said on Tuesday.

Mohamed El-Erian of Pacific Investment Management Co wrote in the firm's Secular Outlook report that Pimco's three- to five-year baseline investment strategy favors the front end of government yield curves in many countries, as central banks will opt to keep negative real interest rates.

Relative to where it is coming from, the financial system will be de-levered, de-globalized, and re-regulated, said El-Erian, who helps oversee more than $800 billion in assets.

Global growth will be lower and unemployment higher, notwithstanding the continued rotation of dynamism away from industrial countries and toward emerging economies.

Industrial countries are veering policy interest rates close to zero as many face or are dealing with negative growth rates, as the credit and banking crisis has sapped global growth. In fact, the International Monetary Fund estimates that banks around the globe will need to write down about $2.8 trillion. So far, about one-third of that has been written off.

Against that backdrop, El-Erian said Pimco will focus on income-generating instruments such as high-quality investment-grade bonds, municipals and short-maturing government bonds from around the world which will outperform pure equity securities, and international investments.

Income-generating instruments will dominate pure equity plays even though they will trade with premiums because they will reflect a permanently higher threat of subordination amid an environment of government intervention, he said.

Price formation in many markets will be influenced by the legacy and, in some cases, continuation of direct government involvement, El-Erian said.

For their part, international investments look attractive based on Pimco's view that the U.S. dollar will fall in value in the long run, El-Erian added.

He said higher unemployment and slow global growth will become the 'new normal' as a result of a sluggish U.S. economy.

Last week, Bill Gross, the manager of Pimco's flagship Total Return Fund, with $150 billion in assets, told Reuters the Federal Reserve will step up its purchases of Treasuries to keep mortgage rates low.

The sudden rise in Treasury yields recently, as improving optimism about the economy has dented the safe-haven bid for government bonds, could complicate the U.S. push to lower mortgage rates and other borrowing costs and kick-start the fragile American economy. A recovery in the housing market is seen as critical to the fortunes of the U.S. economy.

(Editing by James Dalgleish)