Pimco's Gross fearful for debt-weakened economies

Mr Gross, who manages the Pimco Total Return Bond fund, said recent events in Greece, Ireland, Iceland and Dubai had all pointed to a flaw in the respective governments' grand plans to solve debt with more debt, as the governments do not, in reality, have the capability to leverage themselves.

He said: "It is interesting to note that, over the past few months, when investors have begun to question the ability of governments to exit the debt crisis by creating more debt, increases in bond market yields have been confined almost exclusively to Treasury/gilt-type securities, and long maturities at that."

He said this raised the question of whether a highly rated corporation could consistently trade at lowers yields to its home country's debt.

"I suspect not, but the narrowing in spreads since late November solicits an interesting point," he said. "Government bailouts and guarantees such as those in Dubai and Greece suggest a more homogeneous 'unicredit' type of bond market."

Mr Gross, who has been referred to in the past as the Warren Buffett of the bond world, said if core sovereigns such as the US and UK absorbed more credit risk, the credit spreads and yields of these sovereigns should look more like the market they guarantee.

"This suggests if global policymakers are successful with their rescue efforts, sovereign yields will narrow in spreads compared with other high-quality alternatives," he said.

"In other words, sovereign yields will become more credit-like."

Mr Gross said investors should focus on sovereigns whose fundamentals promised lower credit or inflationary risk and stay clear of risky choices, such as the UK and Europe.

He backed Germany and Canada, which are at the top of his investment list, while Greece, the UK and the eurozone were firmly at the bottom.

He added: "An investor's motto should be: 'Don't trust any government and verify before you invest'."