Bond Vigilante Dumps US Debt

This story got a little too little play.

The world’s largest bond fund has gone ultra bearish on the United States, dumping all of its U.S. government-related debt holdings.

The move by Bill Gross’s $236.9 billion PIMCO Total Return fund completed last month comes in the wake of a vicious Treasury market sell-off and just days after he questioned who will buy Treasuries once the Federal Reserve halts its latest round of bond purchases in June.

...worries over the ballooning U.S. budget gap estimated at $1.645 trillion for 2011, political stalemate in Washington over how to narrow it and inflationary fears have all contributed to a steep sell-off in Treasuries. The benchmark 10-year note has seen its yield, which moves inversely to price, rise more than one percentage point since early October to 3.46 percent by Wednesday’s close.

Gross expects further carnage. Just last week, he told Reuters Insider that a 4.0 percent yield for 10-year notes is a “rational expectation” if the Fed “disappears as the buyer of last resort.”

A 4% coupon would increase US interest payments to ~$640Bn/year, which payments MUST be made--if default is not an option.

More here:

Gross’s latest move reflects his defensive positions against higher rates and higher inflation, said Eric Jacobson, director of fixed-income research at Morningstar.

“The even bigger story is the net effect of his government bond sales and derivatives positioning, which takes the fund’s overall duration to 3.9 years versus 5.1 years,” for the bond market’s benchmark, Jacobson said.

Duration is a bond’s sensitivity to interest rate fluctuations, and going short duration is an investment strategy when rates are expected to rise.

Bill Gross is a sharp dude. His fund, PIMCO, has an outstanding track record.