Rather than buy actual bonds, Gross used credit-default swaps, derivative contracts that are similar to providing insurance on debt securities. Under the terms of a credit- default swap, Pimco receives annual premiums in return for agreeing to pay the insured an amount equaling the face value of the bond, minus any residual value, should the issuer of the debt fail to meet its obligations.

The amount of protection sold by the fund on debt issued by individual companies, municipalities and non-U.S. sovereign governments increased to $22 billion as of June 30 from $13.9 billion a year earlier, according to a quarterly report filed Aug. 26 with the U.S. Securities and Exchange Commission.

The 2011 figures included swaps covering $6.9 billion of debt issued by emerging-market countries Brazil, China, Mexico and Indonesia, compared with $2.8 billion a year earlier. The fund had sold credit protection on $3.6 billion of sovereign debt from France, Italy, Germany and Spain as of June 30, the filing shows, along with a combined $4.1 billion of swaps on U.K. gilt and Japanese government bonds.

Rising Insurance Cost

The face value of swaps the fund sold on indexes for high- yield, emerging-market and investment-grade debt rose to $21.6 billion at midyear from $5.6 billion in June 2010. The fund sold $10.7 billion of credit protection on the Markit North America Investment Grade Index in the second quarter, raising the total to $11.8 billion.

The cost of insuring non-Treasury debt has soared since July, a trend that would require Pimco Total Return to mark down its existing agreements in computing daily net asset value. Credit-default swaps rise in value as investor confidence erodes, causing mark-to-market losses for those that have sold protection on bonds.

The fund's coverage on the Markit index would have shown a paper loss of $115.7 million as of Sept. 6, according to Bloomberg data, compared with the $47.8 million gain Pimco calculated as of June 30 in its SEC filing.

'Flight to Safety'

"The recent spread widening of the index is attributable to the flight to safety moves," Otis Casey III, director of credit research in the New York office of Markit, a London-based financial information-services company, said in an e-mail response to questions. Investors "shunned risky assets due to continued concerns of the Euro-zone sovereign-debt crisis, policy uncertainty in the U.S. and fears of a slowdown in global economic growth," Casey said.

Insurance on Italian government debt, priced at 172 basis points as of June 30, more than doubled to 451 basis points on Sept. 6, according to data compiled by Bloomberg. The cost of protecting Brazilian bonds rose 45 percent to 160 basis points, in part because default coverage on emerging-market countries had grown too cheap relative to prices on European debt, said Ajay Jani, a managing director at Gramercy, a Greenwich, Connecticut, investment manager. A basis point, or one-hundredth of a percent, equals an annual payment of $1,000 on a contract protecting $10 million of debt.