Gross says bond yields may not spike by Colin Barr @FortuneMagazine May 3, 2011, 5:55 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons The coming bond market bloodbath won’t necessarily look all that bloody. So says the shy and reclusive Bill Gross, who is out Tuesday with his latest monthly investment outlook. Gross, who runs the world’s biggest bond fund at Pimco, has been screaming for months that the sky is falling in the government bond market, thanks to an untenable U.S. fiscal position and all the problems that come with it. Selloff talk overdone? But in the latest twist on his oft-repeated get-out-of-Treasuries call, Gross is now emphasizing that the sky can fall without actually crushing your skull or anything. The reason to sell government bonds, he says, is not because yields are about to spike, as some of his previous comments (“the end of a great 30-year bull market in bonds”) and actions (shorting Treasury bonds) seem to have implied. No, there is a more mundane reason: you’ll lose your purchasing power even if bond prices stay stable, as inflation rises and the feds hold down rates for the sake of working off their debt. A recent paper on the subject “points out that bond prices don’t necessarily have to go down for savers to get skunked during a process of ‘debt liquidation,’” Gross writes. “The argument over whether the end of QEII on June 30 will result in higher yields and lower Treasury bond prices is, in a sense, a secondary one. Even if 10-year Treasuries stay where they are at 3.30%, and fed funds close to 0%, savers and financial intermediaries are being shortchanged by both of these yields and everything in between.” I for one will not join Gross in weeping at the fate of the poor “financial intermediaries,” also known as the banks, which have tragically seen their lending margins shrink at a time when there is not a huge amount of demand for loans. Savers, on the other hand, do seem to have a pretty good beef with Fed policy, and the longer that goes on the poorer a lot of us will get. Such is life under “financial repression.” In any case, Gross continues to exhort bondholders to get out of government bonds while the going is good. He says the expectations of the past three decades are unrealistic in an age of declining demographics and big bills coming due. Bond – and stock – investors have been sailing on the “Good Ship Lollipop” for over 30 years following the Volcker Revolution and the return of high real interest rates to investment markets. Now, however, with governments attempting to impose financial repression, bond investors should revolt. But note that he is now saying they “should” revolt rather than predicting they will. Like the comment in March that yields would have to rise to all of, um, 4% before Pimco started buying again, this suggests that Gross is not quite as negative on U.S. debt as you might believe. So that turkey shoot he was promising six months ago? Well, it’s still to be avoided, but it may not be the top notch rubbernecking opportunity everyone has been assuming. Also on Fortune.com: How the dollar rout could turn ugly The unsinkable bond market Fed siphons $100 billion from savers Follow me on Twitter @ColinCBarr.