Gross, the manager of the world’s biggest bond fund, increased his bet against U.S. government debt last month while adding to his record cash position – even as bond prices rallied.

Gross’ Pimco Total Return fund held 43 cents of cash for every dollar it had in assets, according to data from the end of April (see chart, right). That’s up from 33 cents in February. The figures are presented on a duration-weighted basis, a measure of the fund’s sensitivity to interest rate changes.

Meanwhile, the fund’s short position on Treasury securities hit 23 cents on the dollar on a duration-weighted basis – meaning Gross has bet nearly a quarter of the fund that government bonds will sell off, raising their yields. The fund’s short position was just 14 cents on the dollar two months ago.

Gross has been warning that U.S. profligacy will leave holders of government bonds holding the bag, arguing that politicians will inevitably shy from the hard choices needed to bring the budget into some semblance of balance. He contends they will instead reduce the government’s burdens over time by doing sneaky things like inflating away the value of the dollar.

Bond investors must flee government bonds whose current low yields fail to compensate them for these risks, Gross has said.

But the yield on the 10-year Treasury note has actually fallen this spring as Gross’ warnings have grown louder. The 10-year yield has tumbled to a recent 3.19% from 3.59% in April just as the news of Gross’ Treasury short was starting to make the rounds.

It isn’t that traders are ganging up on the Pimco manager, though you could hardly blame them at this point. The Treasury rally comes at a time when the U.S. recovery is flagging and Europe’s debt crisis appears to be heating up. Both those trends tend to push investors out of riskier assets such as stocks and commodities and into government bonds, no matter what they might think about the prospect for inflation a few years down the road.

Gross may yet be proven right in his rising-yields bet, of course. U.S. fiscal policy is bonecrushingly stupid and our political institutions have lost an enormous amount of credibility. You’d be a fool to rule out mass flight from Treasuries and the dollar.

On the other hand, what is there to flee to? The euro? Um, no. The yen? Right you are. The Chinese yuan? Not internationally convertible, thank you very much.

This is where Gross’ message starts to sound less compelling. He has been preaching that investors should go for what he calls “safe spreads,” such as bonds issued in foreign currencies by governments and companies that are free of the debt disease infesting the West.

But while the Total Return fund has lightened its allocation to government debt and mortgage bonds in recent months, its holdings of emerging markets and non-U.S. developed debt have been flat.

At the same time its holdings of cash — largely dollars, presumably — have risen 30% in two months. If the United States economy goes off the rails as he so often cautions, the dollar will be our currency and Bill Gross’ problem.