From Reuters:

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.

Gross, who also helps oversee a $1.1 trillion investment portfolio as PIMCO’s co-chief investment officer, has repeatedly warned against U.S. deficit spending and its inflationary impact, which undermine the value of government debt and push up yields as investors demand more compensation for risk.

Over the last five months, 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.”

Dave Kansas at the Wall Street Journal thinks all is not lost:

So, when the world’s biggest bond fund dumps such a significant asset class, what should market players think? In the Treasury market, as the Journal noted, prices are actually rising today.

Is this a case of “buy” on the “selling news?” It is probably an indication that for all of Pimco’s size – it has $237 billion in its Total Return fund – it is not that big compared to the overall U.S. government-related debt market. This week alone the Treasury will auction about $108 billion in bills, notes and bonds.

It is also a reflection of the shifting issues at play in the Treasury market. There is certainly an Oliver Twist concern (“Who Will Buy?”) as the end of the Fed’s QE2 program approaches this summer. Mr. Gross cited this in particular as a reason to sell now. At the same time, the crises roiling the Middle East and North Africa, along with the spike in energy prices, is causing a lot of concern about the economic recovery. Usually, bond investors tend to like such dark mutterings, since weak economies rarely create much inflation, the bogeyman of all bond investors.

Mr. Gross’s thinking is affecting other markets. His view that the Fed’s QE2 will end on schedule this summer, endorsed by his government-debt dump, drove gold off its highs earlier today.

Most people are pointing out that the bond market shrugged this off, and indeed it looks like PIMCO’s strategy might be to sell now and raise capital to buy Treasuries later when yields are forced up by bad fiscal policy. But what if more people follow his lead?What if China starts dumping bonds too?

The occult workings of the treasury market is something we should all be learning about, because it is from here that we’ll see a collapse coming.