Pimco's Gross buys Italian and Spanish bonds

Bill Gross put money where his mouth is, warming up to Spain and Italy while pulling back from the US.

Gross, manager of the world's biggest bond fund at Pimco, cut holdings of Treasury bonds in September for a third month, bolstered by his worries that the US fiscal woes and highly accommodative monetary policy would erode investors' confidence in the world's go-to safe haven asset.

At the same time, he boosted non-dollar bonds sold by developed nations. The move confirmed his comments in an interview Friday with Dow Jones Newswires that he has bought Spanish and Italian government bonds in recent weeks after staying out of the debt market from troubled euro zone economies since the start of the year.

Gross, who runs Pimco's gigantic $278bn Total Return Fund, said the purchases were driven by the European Central Bank, which signaled it will do whatever it takes to hold the euro together. The bank unveiled a bond buying program for the euro zone in a bid to prevent the region's debt crisis from spinning out of control.

The fund's non-dollar, developed debt holdings rose to 11% at the end of September from 7% in August, according to data from Pimco's website yesterday.

In contrast, Gross slashed Treasury debt to 20% at the end of September from 21% at the end of August and 33% at the end of July. The share still puts Treasurys as the second largest for the bond fund.

US mortgage-backed securities, the number one asset class held by the bond fund, was 49% compared to 50% in August and 51% in July.

In recent months, Gross, founder and co-chief investment officer at Pimco, has warned that Treasury bonds, especially longer-dated maturities, would sell off if the US fails to fix its fiscal illness over the longer term.

Treasury bonds "could be burned to a crisp," Gross wrote in his October investment outlook published earlier this month.

Gross is also worried that the Fed's printing money to support the economy via its bond-buying program could generate higher price pressure in the longer term, which erodes the fixed return of bonds over time.

"We still have substantial Treasury positions but not longer than 10 years in nominal Treasurys," Gross said.

Gross's fund has done well so far in 2012, benefitting from bets this year on the Fed's buying mortgage-backed securities to boost growth. The Fed did say in September that it would buy $40bn of MBSs per month, with a pledge to keep buying until the labour market shows sustainable and strong recovery.

Gross's fund has posted a 2012 return of 9.27% through Tuesday, beating 90% of comparable bond funds and outperforming a 3.86% return on the benchmark Barclays US Aggregate Bond Index.

Over the past 15 years, the fund has handed investors an annualised return of 7.38%, compared to 6.12% on the benchmark index. Pimco, part of Allianz, is one of the world's biggest asset management companies, with over $1.8 trillion in assets under management.