Pimco's Gross Buys Treasurys in October

--Gross bought Treasurys in October, the first time since May

--Treasury holdings rose to 12%, from 9% in September; TIPS holdings rose to 12% from 11%

--Gross favors intermediate Treasurys in time of uncertainty about "fiscal cliff"

--Gross remains selective in Treasurys; sees long-term downside risk for bonds

Bill Gross has warmed up to Treasury bonds again at a time when investors world-wide are worried about the looming "fiscal cliff" in the U.S.

Mr. Gross raised holdings of regular Treasury bonds for the $281 billion Total Return Fund (PTTRX) at Pacific Investment Management Co. to 12% in October, based on data from the company's website.

It was the first time Mr. Gross, Pimco's founder and co-chief investment officer, boosted Treasury debt holdings for the world's biggest bond fund since May. The share increased from 9% in both August and September, though it was below this year's peak of 29% in January.

The embrace of Treasury bonds last month shows some initial signs that even as Mr. Gross has argued in recent months that Treasury bonds won't be a good investment in a longer-term perspective, he was using the safe-harbor market to hedge against uncertainty over the global economic outlook.

Global investors are confronting the euro zone's sovereign debt crisis and the prospects of a more than $600 billion fiscal tightening in the U.S. due to kick in early next year, known as the U.S. "fiscal cliff."

Economists have warned that allowing this fiscal retrenchment to go in full force may tip the U.S. economy to a recession in 2013.

Investors are keeping a close eye on how President Barack Obama and congressional Republican leaders would reach a compromise to cushion the effect. A sticking point for the negotiations has been that Mr. Obama said any compromise would have to include higher taxes levied on wealthier Americans. That doesn't sit well with House Speaker John Boehner who said Republicans won't agree to higher income-tax rates.

The "tug of war" between Mr. Obama and Mr. Boehner "reveals nothing new but Obama holds better cards," said Mr. Gross in a Twitter message Friday. "Tax rates on high income and capital [are] going up."

Mr. Gross said this is negative for riskier assets, adding that he favors municipal debt and Treasury bonds in the intermediate sector--those maturing in five years to seven years.

Analysts said Treasury bonds could lose ground to stocks and other riskier assets if U.S. political leaders reach a solution on the fiscal cliff. Conversely, Treasury bonds would rally if no deal emerges. A drawn-out negotiation process also favors Treasury bonds because many investors would prefer playing it safe in a time of uncertainty.

The selective exposure to Treasury bonds continues to reflect Mr. Gross's worry that Treasurys maturing in 10 years and beyond could lose value in the longer term.

In recent months, Mr. Gross has shied away from these longer-term securities. He has cited the bloated U.S. fiscal deficit and the Federal Reserve's highly accommodative monetary policy as risks of higher inflation in coming years that would erode the value of long-dated Treasury bonds.

In a Twitter message Monday, Mr. Gross argues that the U.S. has a "grand canyon" budget problem beyond the fiscal cliff, pointing to a $1.5 trillion fiscal gap that needs rebalancing long-term.

Without a solution to the fiscal shortfall, Mr. Gross has warned recently that foreign investors could lose confidence in the dollar as the world's reserve currency and Treasury bonds as the No. 1 market in a flight for safety.

Reflecting his desire for inflation protection, Mr. Gross also boosted holdings of Treasury inflation-protected securities to 12% in October from 11% in September.

Holdings of U.S. high-quality mortgage-backed securities slipped to 47% in October from 49% in September, though the sector still accounts for the biggest share of the fund.

The move signaled Mr. Gross booked profit from his wagers on the Fed to buy MBS to support the economy. The central bank announced a program to buy these securities after its September monetary policy meeting.

The right bets on the Fed have boosted the fund's performance. The fund has handed investors a return of 10.5% in 2012 through Friday, beating the 4.98% of the Barclays U.S. Aggregate Bond Index, according to data from Morningstar.

Over the past 15 years, the bond fund has returned 7.35%, compared with the 6.09% return on the benchmark.

Part of Allianz SE (ALV.XE, ALIZF), Pimco is one of the world's biggest asset-management companies, with more than $1.8 trillion in assets under management.

Write to Min Zeng at [e-mail]

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