The world's largest bond fund began betting against the United States last month by taking short positions on its debt on expectations the nation's shaky finances will drive interest rates higher and imperil its triple-A rating.
Bill Gross, Pacific Investment Management Co. LLC's oft-quoted co-chief investment officer, in January warned that "mindless" U.S. deficit spending could result in higher inflation and a weaker dollar.
He has also been raising alarms about a lack of buyers for Treasuries once the Federal Reserve ends its own bond purchase program, also known as quantitative easing, in June.
The portion of Pimco's $236-billion (U.S.) Total Return Fund held in long-term U.S. government debt, including U.S. Treasuries, declined to "minus 3" per cent in March from zero in February and 12 per cent in January, according to Pimco's website.
"They are one of the largest investors in the Treasury market, so yes, it is significant," said Gary Pollack, a portfolio manager with Deutsche Bank Private Wealth Management in New York.
"They have the ability to move the market, that is something that makes me a little nervous."
Investors in exchange-traded funds and futures have mirrored the Pimco trend in recent weeks.
Pimco expects the lingering U.S. budget deficit and the Fed's easy monetary policy will fuel faster inflation and hurt the dollar.
Mr. Gross' shorting of Treasuries in March preceded Washington's narrowly averting a government shutdown after Democrats and Republicans agreed late Friday to cut $38-billion in spending for the fiscal year.
The 11th-hour compromise probably had little impact on the investment strategies of Mr. Gross, who said in an April newsletter that the U.S. government was "out-Greeking the Greeks," a reference to Greece's out-sized government debt that forced the country to ask for a bailout.
"We are smelling $1-trillion deficits as far as the nose can sniff" if the government fails to address the biggest entitlement programs: Medicare, Medicaid and Social Security, Mr. Gross said in his outlook.
Investors have pulled money from Pimco's Total Return Fund, which registered $1.59-billion of outflows last month, according to Lipper. That was the fifth straight month of outflows, the longest streak of net redemptions since Lipper began tracking the data in 2004, totalling $18.05-billion of withdrawals.
Like other bond managers, Pimco attracted huge net inflows after the global financial crisis, and oversees more than $1.1-trillion. The Total Return Fund has returned 1.48 per cent this year, putting it in the top 22 per cent of similar funds as catalogued by Morningstar, but it has lagged major U.S. stock indexes.
Treasuries have come under selling pressure on signs the U.S. economic recovery is strengthening, and the outflow that began in November has led to reallocation into other sectors, including stocks and commodities.
Pimco's move echoes a broader dislike of U.S. Treasuries. Some ETFs that bet against the Treasury market have seen a jump in volume lately. Volume in the ProShares Short 20+ year Treasury, which shorts the Barclays Capital U.S. 20+ Year Treasury Bond Index, last Thursday had its most active session since Feb. 24.
Speculators went net short on Treasuries for the first time in six weeks as of April 5, according to the latest data from the Commodity Futures Trading Commission. In a short position, an investor sells a borrowed security on a bet it can buy it back later at a lower price.
The Total Return Fund's cash equivalents, including Treasury bills and other debt with maturities of less than a year, rose to 31 per cent of the fund's assets from 23 per cent in February.
It also reduced mortgage-backed debt holdings to 28 per cent in March from 34 per cent in February.