News of the world's biggest bond fund dumping U.S. government debt sparked fears on Wednesday that investors may have little faith in the recovery.
The $237 billion PIMCO Total Return Fund held no government debt by the end of February, according to multiple reports. Legendary investor Bill Gross told PBS Nightly Business Report that this was because yields were artificially low thanks, in part, to the Federal Reserve's $600 billion bond-buying program.
But PIMCO's move is an extreme measure, says David Ader, head of government bond strategy at CRT Capital. "It means they have utter disdain for the asset class."
Investors and analysts expressed concerns that the value of government bonds could drop in June once the Fed ends the $600 billion quantitative easing program.
"We're all worried about what happens when the Fed stops buying," said Ader. "PIMCO is merely a microcosm of the bigger position of the market, and the fears that we all have," he said. "We're all freaking out over deficits."
In a letter to investors released last week, Gross asked: "[W]ho will buy Treasuries when the Fed doesn't?" Speaking to Yahoo Finance, Gross also warned that there was a chance the government would be forced to continue spending money to boost the economy after the program ends, adding to the deficit. (Scroll down for video.)
Investors also warned against seeing PIMCOS's move as commentary on the economic recovery.
David Dietze, chief investment strategist at Point View Financial Services, said that while PIMCO is a huge player, their trade was over in February and didn't reflect more current economic events like higher then expected unemployment numbers released on Thursday.
"They've sold, so the market already reflects that holder dumping, one of the biggest sellers on the block is gone." But, he said, trades are often cyclical, and even the Federal Reserve is unsure about what will happen to the economy next. "What prompted PIMCO to start dumping may not prevail, I see other investors shrugging it off," said Dietze.
Indeed, PIMCO founder Gross also told PBS Nightly Business Report that while one fund sold all the government-backed bonds it held, the firm as a whole still holds $30 to $40 billion of U.S. Treasury bills. And, as the credit ratings of governments around the world fluctuate, there is still strong demand for safe, reliable U.S. government debt.
There were concerns PIMCO's sell-off of Treasury bonds would lead to others following suit. Jim Rogers, an investor who predicted the U.S. housing-market crash, told Bloomberg that U.S. government bonds were "not a save haven," and Bloomberg reported other signs that investors are moving away from U.S. government bonds.
WATCH Gross interview with Yahoo Tech Ticker: