UPDATE 3-Bill Gross goes short in bet against the U.S.

* Gross shorts US government debt, raises cash to $73 bln

* No confidence in Fed policy, ‘mindless’ deficit spending

* Investors share Gross’ sentiments; short bonds
(Recasts, new throughout; adds byline)

By Al Yoon and Jennifer Ablan

NEW YORK, April 11 (Reuters) – Bond King Bill Gross is
shorting America.

The fund manager who runs the world’s largest bond fund has
raised the stakes on his bet U.S. government debt prices will
drop because he expects interest rates to climb, the dollar to
fall and the United States to lose its AAA rating.

After selling all of the U.S. government debt holdings held
by his $236 billion Total Return fund (PTTRX.O: Quote, Profile, Research) at PIMCO in
February, Gross ratcheted up his bearishness last month by
taking a short position, according to PIMCO’s website.

Gross is not only betting against the government’s ability
to get the U.S. budget deficit and debt burden under control,
but also giving the Federal Reserve’s ultra easy monetary
policy a vote of no confidence.

In particular, he has said he fears the day the Fed’s $600
billion Treasury purchasing program ends, as it will leave the
U.S. bond market vulnerable to a severe sell-off.

“We have a show-down brewing between the biggest bond fund
manager and the Fed,” wrote Richard Gilhooly, director of rates
strategy at TD Securities.

Gross, who helps oversee $1.2 trillion in investments as
PIMCO’s co-chief investment officer, has also repeatedly warned
against “mindless” 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 six months, worries about the ballooning U.S.
budget gap, estimated at $1.645 trillion for 2011, and
inflationary fears have played a big role in the steep sell-off
in Treasuries.

Compounding the severe selling pressure, investors last
week contended with a near-shutdown of the government and the
possibility of the United States hitting its $14.3 trillion
debt ceiling on May 16.

The yield on the benchmark 10-year Treasury note, which
moves inversely to price, has risen more than one percentage
point since early October, to 3.58 percent on Monday.

In his latest investment letter to clients, Gross said the
U.S. government is “out-Greeking the Greeks, dear reader” — a
reference to Greece’s outsized government debt that forced the
country into 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 including Medicare, Medicaid and Social
Security, he added.

BOND VOYAGE

In a sign of how ever more bearish Gross has become,
exposure in his Total Return fund’s long-term U.S. government
debt holdings, including U.S. Treasuries, declined to “minus 3”
percent in March from zero in February and 12 percent in
January. That values his short bet at about $7 billion.

What’s more, the fund now holds a third of its assets in
cash and cash equivalent — a staggering $73 billion. That is
up from cash and cash equivalent holdings of 23 percent as of
Feb. 28, from 11 percent at the end of January.

“The Fed is … trying to hold long rates down and the
minus 3 percent in Treasuries is taking the other side of that
bet,” TD Securities’ Gilhooly said.

Gross’ extreme call against the U.S. government because of
its worsening budget deficit and debt problem is also reflected
in his fund’s holding of debt issued by Brazil, Spain and other
foreign governments.

PIMCO’s move echoes a broader dislike of U.S. Treasuries
among investors.

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.

Some ETFs that bet against the Treasury market also have
seen a jump in volume lately. Volume in the ProShares Short 20+
year Treasury (TBF.P: Quote, Profile, Research), which shorts the Barclays Capital U.S.
20+ Year Treasury Bond Index, last Thursday had its most active
session since Feb. 24.

Gross’ big moves are taking place as investors pull 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,
totaling $18.05 billion of withdrawals from the fund since
November.

Like other bond managers, PIMCO attracted huge net inflows
in the wake of the global financial crisis. But with economic
growth strengthening, the outflow that began in November has
led to reallocation into other sectors, including stocks and
commodities like gold.

The Total Return Fund has returned 1.48 percent this year,
putting it in the top 22 percent of similar funds as cataloged
by Morningstar. But it has lagged major U.S. stock indexes.
(Additional reporting by Richard Leong, Karen Brettell and
Daniel Burns in New York, and Kevin Plumberg in Singapore;
Editing by Dan Grebler)

UPDATE 3-Bill Gross goes short in bet against the U.S.