PIMCO Total Return dumps government-related debt

NEW YORK (Reuters) - The world's largest bond fund dumped all of its U.S. government debt in the biggest signal yet of how negative investors have become about the U.S. Treasury market.

The move by Bill Gross's $236.9 billion PIMCO Total Return fund 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.

Bond prices have come under severe selling pressure because of a strengthening U.S. economy and as investors brace for what could happen when the U.S. central bank ends its controversial quantitative easing program. The 10-year Treasury yield hit a 9-1/2 month high of 3.77 percent on February 9, rising 40 basis points in the short period from the end of January.

Last week, Gross 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," Gross said.

Pacific Investment Management Co's Total Return fund sold all its U.S. government-related securities, including U.S. Treasuries and agency debt, a source familiar with the fund's holdings said on Wednesday.

A PIMCO spokesman declined to comment.

In January, the Total Return fund slashed its U.S. government-related debt holdings to the lowest level in at least two years and increased cash and debt holdings from other developed nations.

"It's certainly an important signal in the sense that they are allocating away from Treasuries in favor of a higher spread product," said Christian Cooper, head of U.S. dollar derivatives trading at Jefferies & Co.

Government-related securities include Treasuries, Treasury Inflation-Protected Securities, agencies, interest rate swaps, Treasury futures and options, and corporate securities guaranteed by the U.S. Federal Deposit Insurance Corp.

Gross, who also helps oversee more than $1.1 trillion as PIMCO's co-chief investment officer, has often railed against U.S. deficit spending and its inflationary impact. He has advocated buying bonds with "safe," higher yields -- such as emerging-market bonds -- that can withstand possible erosion of returns by inflation.

The Total Return fund's cash holdings surged to $54.5 billion as of February 28 from $11.9 billion at the end of January.

Cash is defined as anything that has a duration -- a bond's sensitivity to interest rate fluctuations -- of less than 1 year.

But PIMCO may have other asset-allocation plans. In a December regulatory filing the Total Return fund said it may start investing up to 10 percent of its assets in "equity-related" securities, such as convertibles and preferred stock, after the first quarter of 2011.

(Additional reporting by Emily Flitter; Editing by Padraic Cassidy)