Default is the most obvious risk that bond investors face, but not the only one—they also need to worry about things like inflation. Gross has left Treasuries simply because he thinks the yield offered is no longer high enough to compensate him for things like inflation risk. “Global savers have earned yields of 1 percent over inflation over the last half century,” he told me. “Now you’re not earning the historical rate.”

Gross is known for getting out when the getting isn’t good. You can perhaps credit his Canadian parentage for his remarkable discipline. Canada’s banking system is one of the few entities that skirted the financial crisis—as did the funds run by Bill Gross, who was worrying about a mortgage crisis as early as 2005, and positioned his funds accordingly. Yet even with solid Canadian genes, that discipline wasn’t always easy to maintain. “In 2006 and 2007, we were sort of questioning our own judgment, because we were half a percentage point behind our peers … You question whether you’re just really being a stubborn donkey, or your premises are right.”

Unfortunately, they were; they usually are—the Total Return Fund has averaged 7 percent returns over the past 10 years, ranking it third among intermediate-term bond funds. Gross says the essential trick is being “a contrarian, but not an extreme contrarian … a pessimist, but not an extreme pessimist.” Being right too early, he points out, is almost as bad as being wrong—as the folks who shorted the stock market in 1996 can attest. Yet the predictions he’s making now sound pretty pessimistic: after a 30-year rally in the stock and bond markets, he thinks we now have to adjust to a “new normal” of slower growth and lower returns.

In some ways, this is just Gross’s “old normal.” He started investing in the early 1970s, when inflation was soaring. Inflation is bad for bonds, because they have a fixed payout—as money loses value, the real value of your interest payments declines, and worse, people want to buy the bonds from you only at a discount. “The first 10 years, it was ‘Preserve capital, preserve capital, preserve capital,’” Gross told me, adding glumly, “Now we’re back to that.”

But in between, he profited greatly off a long rally, which has spanned most of his career. In 1980, the Fed finally got tough on inflation, which declined, along with interest rates, slowly but steadily for most of the next three decades. It was the 1970s in reverse. As Gross says, “Investors got used to being on this magical journey, with bonds not only producing a nice yield, but some capital gains too.” In 1984, the yield on a 10-year Treasury note averaged 12.46 percent. By 2001, it was 5.02 percent.

But now the rally has ended, as it had to (inflation couldn’t fall forever). Indeed, yields are even lower than you’d expect. As of mid-March, they were around 3.3 percent—lower than they were in 1962, when inflation averaged just 1.3 percent. These low yields are partly due to a global “flight to quality,” which has pushed up the demand for safe assets. U.S. Treasuries are a prime destination for capital refugees, because our government’s default risk is low, and our economy is very, very large. Especially with the Obama administration obligingly running record deficits, we’ve had a lot of Treasury debt to go around. Thus, the financial crisis that started in our financial markets has ironically made borrowing much cheaper for our government.

Gross argues that increased demand is not the only factor pushing down yields. To fight the crisis, the Federal Reserve has aggressively expanded the money supply, in large part by dumping new money into the Treasury market. “We’ve been supporting Treasuries almost one for one,” he tells me. “At 8 a.m., the Fed calls up and asks our Treasuries desk for offers to buy, and one hour later, the Fed’s asking for bids to sell them.” The Fed, complains Gross, is “picking the pockets” of investors. Though he can’t quite bring himself to blame the financial powers that be. “God bless Ben Bernanke and Tim Geithner for what they’re trying to do, but the net result of a lot of what they’re doing is to take money out of the hands of savers.”