At the end of March Bill Gross, manager of the largest bond mutual fund on earth, told Bloomberg, “Bonds have seen their best days… Real interest rates are moving higher. That's the main bear element in the bond market.” That sure sounds to me like a bearish position on long bonds.

Those playing this bearish bond (bullish on inflation) trade have gotten hammered over the past month losing nearly 10% over that time. Somehow, though, I doubt Gross was hurt that badly. In fact, in his latest letter he sounds a lot less bearish on long bonds:

Several months ago I rhetorically asked whether it was possible to get out of debt crisis by increasing debt. Yes – was the answer, but it was a qualified yes. Given that initial conditions were favorable – relative low debt as a % of GDP, with the ability to produce low/negative short-term policy rates and constructively direct fiscal deficit spending towards growth positive investments – a country could escape a debt deflation by creating more debt. But those countries are few – the U.S. among perhaps a handful that have that privilege, and investors, including PIMCO, have strong doubts about U.S. fiscal deficits leading to strong future growth rates.

So the developing predicament is becoming more obvious to Shakespeare’s “lenders and borrowers be.” Fiscal tightening and budget conservatism may have come too late for Greece and its global lookalikes. Continued deficit spending may be an exorbitant privilege extended to only a few. Caught in the middle are many developed countries that likely face New Normal growth rates and a continued bumpy journey toward that destination. Investors must respect this rather tortuous journey in the months and years ahead for what it is: A deleveraging process based upon too much debt and too little growth to service it.

Gross has talked about deleveraging before but here he seems to be saying that the U.S. likely faces severe growth challenges ahead which would obviously put a lid on inflation. He also suggests that the country (like Japan over the past 20 years) may be one of the few able to maintain low interest rates while growing the national debt. This is a long way from, “bonds have seen their best days,” and, “real interest rates are moving higher.” In fact, since he said this bonds have seen some pretty damn good days as rates have moved significantly lower (chart above).

So was Gross just talking down long treasury bonds in late March so he could accumulate a position? Certainly it's gotta be tough moving upwards of a $1 trillion around. I imagine it would help a great deal to have a selling bias in the marketplace when you need to be a buyer in that kind of size. Barron's reports that this may have been the case:

Gross helps manage more than $1 trillion worth of assets at Pimco. In recent weeks, Gross has said that investors world-wide are liquidating holdings amidst the uncertainty caused by Europe's debt problems. Last week, Pimco's Total Return Fund, its most prominent fund, revealed that it had increased its holdings of US government debt to 36% of the portfolio in April, its highest level since last November.

Gross also disclosed that he personally bought a significant amount of his firms' Corporate Opportunity Fund which maintains an average maturity over ten years. Someone who truly believes that, “bonds have seen their best days,” would be very unlikely to utilize this kind of fund.

At the end of the day, 'actions speak louder than words,' and while Gross may have been spouting bearish warnings he and his firm were trading the other side. In my experience, when it comes to large, successful institutional investors like Gross the rhetoric usually makes for, “good headlines and bad trade ideas.”