The bond market has gone into free fall in recent weeks. But bond guru Bill Gross apparently thinks it's much ado about nothing -- and he's letting his money do the talking for him.

Embracing the new normal
Recently, investors have heard plenty from Bill Gross. He's one of the major advocates that a major paradigm shift in investing strategy has already occurred, coining the idea of the "new normal" to refer to the changed climate for investments going forward. In essence, Gross' new normal involves lower returns on stocks and a need for goal-seeking investors to set aside more money in order to reach their nest-egg targets.

To skeptical investors, that might just sound like a bond fund maven talking up his own book. But Gross has had some negative things to say about bonds, too. Recently, he told Bloomberg Radio that "bonds have seen their best days" and that interest rates could rise precipitously. That's exactly what subsequently happened, as bond yields raced higher in the wake of quantitative easing.

So in light of those on-point predictions, you might expect Gross to be steering clear of bonds. Instead, though, he's making some bold bets by buying shares of his company's closed-end bond funds.

Big buys
Over the past two weeks, Gross has spent more than $18.5 million buying shares of Pimco-branded bond closed ends. He began by focusing on municipal bond funds, which had started to fall because of huge supply pressure and the prospects of the expiration of the Build America Bonds program, which state and local governments have used extensively to finance government spending projects. Here are the muni funds he bought:

Closed-End Fund

Amount Purchased

Premium/Discount on Days Bought

Pimco Muni Income III (NYSE: PMX) $1.7 million 7.51%-8.82%
Pimco California Muni Income (PCQ) $1.3 million (0.51%)-2.17%
Pimco California Muni Income II (NYSE: PCK) $1.1 million 12.21%-15.06%
Pimco California Muni Income III (PZC) $592,000 2.13%-2.87%
Pimco Muni Income (PMF) $839,000 10.63%-11.90%

Source: Capital IQ, a division of Standard & Poor's; CEFConnect.

Later, he moved into the corporate bond market with additional buys of different closed-end bond funds:

Closed-End Fund

Amount Purchased

Premium/Discount on Days Bought

Pimco Corporate Income (NYSE: PCN) $3.0 million (2.33%)-(1.67%)
Pimco Corporate Opportunity (NYSE: PTY) $4.1 million (2.70%)-(1.97%)
Pimco Income Strategy (NYSE: PFL) $1.8 million (1.26%)-0.18%
Pimco High Income (NYSE: PHK) $2.4 million 34.72%-38.43%
Pimco Income Strategy II (NYSE: PFN) $1.7 million (3.26%)-(2.24%)

Source: Capital IQ, a division of Standard & Poor's; CEFConnect.

Admittedly, there are a lot of numbers in those tables. But a few things stand out:

  • First, with a number of these funds, Gross was able to pick up shares at a discount to their net asset values. That's extremely rare for most of Pimco's closed-end funds, most of which almost always trade at premiums to NAV.
  • Even among the funds that did trade at premiums, the amount of the premium was usually quite a bit lower than its typical level. For instance, with Pimco's High Income fund, premiums had risen to nearly 50% in the previous month and touched about 60% about a year ago.
  • In the days immediately after Gross' trades, all of these funds recovered quite a bit of ground. Whether it's because of Gross' confidence or a turnaround in the bond market, Gross -- and any investors who followed his moves -- profited nicely from his quick action.

What does this mean?
Of course, we don't know exactly why Gross bought shares when he did. But I think the odds are good that he saw a reasonable short-term opportunity to buy shares at attractive levels, and he jumped on it. Especially with closed-end funds, big disparities in value like this can definitely happen, but they don't last very long.

If strange behavior in the bond market continues to happen, then you may well have another opportunity to pick up bargains like these. But that doesn't mean you should buy these closed-end funds now that they've recovered substantially. Only by waiting for drops will you maximize your chances for profit.

Closed ends are just one way to take advantage of exchange-traded products. To learn more about top ETFs, tune in to The Motley Fool's new special free report, "3 ETFs Set to Soar During the Recovery."

Fool contributor Dan Caplinger thinks the new normal is a grossly pessimistic assessment of the future. He doesn't own shares of the funds mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy bought a 144-count box of Snuggies for holiday gifts -- expect one in your mailbox soon!