Pimco's Gross: Leave U.S., Buy Abroad

Bill Gross of Pimco Total Return(PTTAX) and Bob Rodriguez of FPA New Income(FPNIX) say investors should prepare for a prolonged recession and more turmoil in bond markets. For protection, the bond managers recommend owning government-backed securities and avoiding riskier corporate debt. Their views carry weight because they have long records for making accurate forecasts.

Gross's pessimism is especially noteworthy. As manager of the $150 billion Pimco Total Return, the largest bond fund, he has long been an influential figure whose moves are closely watched by other managers.

During the past decade, Gross has finished in the top half of the intermediate-term bond category during nine years. By avoiding subprime mortgages, he outperformed 98% of his competitors in 2007, according to Morningstar. Last year the Pimco fund finished in the top quarter of the field with bets on AAA-rated securities.

Gross has most of the fund's assets in safe mortgage securities of Fannie Mae(FNM) and other agencies, now backed by the U.S. Treasury. He is steering away from corporate bonds rated below investment grade.

Speaking at the Morningstar Investment Conference in Chicago last week, Gross said caution is necessary because rising federal debt will crimp economic growth for years. He noted that government debt now equals 60% of the gross domestic product. Within four years, the figure will climb to 100%. When that happens, ratings agencies will lower the U.S. credit rating from AAA to AA. Eventually the dollar will lose its status as the world's reserve currency. All that will undermine confidence in stocks and bonds, Gross warned. "We simply have too much debt," he said.