The world's largest bond fund began betting against U.S. government debt last month on the expectation that shaky finances will jolt interest rates higher.
PIMCO, through its outspoken co-chief investment officer, Bill Gross, have been raising alarms about a lack of buyers for Treasuries once the Federal Reserve ends its own bond purchase program, also known as QE2, in June.
In February Gross revealed his ultra-bearish view on the United States by dumping all of his fund's U.S. government-related debt holdings.
The portion of PIMCO's $236 billion Total Return Fund held in long-term U.S. government debt, including U.S. Treasuries, declined to "minus 3" percent in March from zero in February and 12 percent in January.
In a short position, an investor sells a borrowed security on a bet it can buy the bond back later at a lower price.
Cash equivalents, including Treasury bills and other debt with maturities of less than a year, rose to 31 percent of the fund's assets from 24 percent in February.
PIMCO also expects the lingering U.S. budget deficit and the Fed's easy monetary policy will fuel faster inflation and hurt the dollar.
PIMCO's vote on the state of U.S. finances comes just as Washington narrowly averted a government shutdown on Saturday after Democrats and Republicans agreed on cutting $38 billion in spending for the fiscal year.
The 11th hour compromise probably had little impact on the investment strategies of Gross, who said in an April newsletter that the U.S. government was "out-Greeking the Greeks," a reference to the out-sized government debt in Greece 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, Gross said in his outlook.
PIMCO's move mirrors a broader dislike of U.S. Treasuries. Some exchange-traded funds that bet against the Treasury market have seen a jump in volume lately. Volume in the ProShares Short 20+ year Treasury (TBF.P), which shorts the Barclays Capital U.S. 20+ Year Treasury Bond Index, on Thursday of last week had its most active session since February 24.
And 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.
U.S. Treasury yields have moved higher since the Fed began purchases of the securities in its second quantitative easing program in November. Yields on 10-year Treasury notes have risen 80 basis points since then to 3.59 percent.