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Weapons drawn, Gladiator Gross vows victory in 'bond wars'

Russell Crowe with sword in a scene from the film 'Gladiator', 2000.
Universal | Getty Images
Russell Crowe with sword in a scene from the film 'Gladiator', 2000.

In a new note to clients on Thursday, Pimco's bond chief Bill Gross promised the fund would triumph in the "bond wars" that could see investors earn lower returns, characterized by sustained easy money policies.

In the midst of a debate over whether the Federal Reserve is planning a strategic retreat from its massive monetary stimulus, Gross wrote in an investment note published on Thursday that bond managers "must adapt to a new world of near zero bound interest rates and the likelihood of lower total returns."

In colorful language chock-full of war metaphors and weapons references, Gross added that investors must focus on carry and investment diversity, in order to guard against "downside risks" that could roil markets.

Gross—notorious among Wall Street for his colorful investment research—likened the whipsawing of bond yields to Britain's 1916 battle of the Somme against German forces. He has good reason to compare his battle against market forces to a war: in June, investors yanked more than $14 billion from Pimco's U.S. mutual funds, according to data from Morningstar. Since May, redemptions have topped $18 billion, Morningstar analysts recently said.

(Read more: Pimco's Bill Gross Looks at the Man in the Mirror)

"Now that bonds have suffered a near Somme-like defeat in the past few months, fixed income investors are concerned about their prior conceptions of bonds as an asset class—an asset that has historically provided reliable income and stable to higher prices," he wrote.

The nearly $300 billion fund—the world's largest—has recently been caught flatfooted by the selloff in U.S. Treasurys. In May, the fund posted a negative return of about 1.9 percent, its biggest monthly loss since 2008. In 2011, Pimco sold off all its government debt—in anticipation of a bond blowout that ultimately never materialized.

"While our strategic execution in May/June of 2013 can and has been publicly faulted, we are confident that we know how to win this evolving bond war," Gross said.

"We have spent months—indeed years—preparing for this new dawn. We intend for you—our clients—to be surviving veterans of this battle, not casualties," he added. "Pimco will not go down at the Somme."

—By CNBC's Javier E. David

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