Some of the world’s leading investors are growing more worried about deflation and are re-shaping their portfolios to prepare for a possible period of falling prices.

Bond-fund heavyweight Bill Gross, investment manager Jeremy Grantham and hedge-fund managers David Tepper and Alan Fournier are among the best-known investors who are bracing for deflation, a development that could cripple global economies and world stock markets.

The investors cite weak economic figures and a mounting consensus that global policy makers are reluctant, or unable, to take further steps to boost growth as reasons for their market positions.

‘Deflation isn’t just a topic of intellectual curiosity, it’s happening,’ says Mr. Gross, who runs the $239 billion mutual fund Pimco Total Return Fund, citing an annualized 0.1% drop over the past two years in the U.S. consumer-price index. ‘It’s an uncertain world that’s tipping toward deflation.’

These investors are walking a fine line. Many in the market scoff at the possibility of extended deflation, betting the U.S. Federal Reserve and other central banks will take radical steps to arrest broad price declines. Deflation scares immediately following the 2008 financial crisis didn’t materialize, in large part because central banks intervened.

Many of these star investors don’t see extended deflation as a sure bet and predict that, as deflation becomes more likely, the Federal Reserve and other government officials will take radical steps to arrest the decline.

Still, preliminary signs of deflation are spurring Mr. Gross and the others to take on huge positions of interest-bearing investments such as bonds and dividend-paying stocks. They have also begun buying protection against possible stock-market losses. In a period of falling prices, companies can find it challenging to generate profits, putting pressure on stocks.

Recent data are responsible for the worries. The consumer-price index rose 1.1% in June compared with a year earlier. Friday’s report on second-quarter gross domestic product showed the underlying inflation rate-which excludes volatile moves in food and energy prices and is closely watched by the Fed-increased 1.1%, the lowest reading since the first quarter of 2009. St. Louis Fed President James Bullard last week warned of a Japan-like period of deflation and slow growth.

Such mainstream talk about deflation is a sharp reversal from just two months ago, when inflation, not deflation, was the focus of traders. Investors such as John Paulson, renowned for his bets against the U.S. housing market, piled on gold positions and dumped U.S. Treasurys.

Mr. Gross has been aggressively buying U.S. government debt in recent weeks. Treasurys now account for about 51% of the portfolio of his Pimco Total Return fund, up from less than 33% at the end of March. It is as high an allocation to government securities for the fund as at any time in the past six years, according to Morningstar Inc. The fund has gained 7% this year.

Mr. Tepper, who runs the $15 billion hedge fund Appaloosa Management LP, has about 70% of his portfolio in bonds rated ‘BB’ and ‘BBB’-the lowest end of the investment-grade spectrum and the upper tier of ‘junk’-from banks and others. That is up from 63% earlier this year, investors say, helping him score gains of about 12% in 2010. He is sticking with credits that promise generous yields but still are relatively safe bets in any period of weak growth and potential deflation. ‘I’m concerned that slower growth may lead to a much tougher environment for pricing,’ Mr. Tepper says. ‘That can mean deflation in some industries, even if we get inflation in the overall economy.’

Deflation is seen as pernicious and hard to address once it sets in. Falling prices can make businesses and consumers reluctant to spend and invest, hurting profits and crippling the economy. It can be caused by a drop in the money supply and credit, declining spending and high unemployment, all of which can encourage companies to cut prices.

‘We fear that core inflation readings in the United States could dip into outright deflationary territory in coming months,’ Argonaut Capital, whose returns are flat for the year, recently told investors. ‘This should be a positive for longer-dated fixed income.’

Gregory Zuckerman