Smart U.S. Money Managers Dumped Long Term Treasury Bonds, Who Are Holding The Bag?

We all read about the story that, at the beginning of March,  Bill Gross at PIMCO dumped all of his U.S. treasury holdings in PIMCO Total Return Fund (PTTRX). With $237 billion dollar of assets, PIMCO Total Return Fund is the largest bond fund in the U.S., in fact, the largest fund in the world.

Based on a recent analysis by MyPlanIQ.com, all 12 intermediate bond and total return bond funds tracked by MyPlanIQ SmartMoneyIQ, have liquidated and now hold virtually none or little in long term U.S. treasury bonds in their portfolios. These funds are managed by some of the best fixed income managers. They include Loomis Sayles fund (LSBDX), managed by Dan Fuss, TCW Total Return Bond (TGLMX), Western Asset Cord Bond (WATFX) and Templeton Global Bond (TGBAX). For more detailed fund portfolio asset allocation analysis, please refer to MyPlanIQ Smart Money Allocation Manager page.

If all the smart money managers dumped treasury bonds, it begs the question:  who are holding the bag now?

The following are possible candidates:

1. Federal Reserve: As of Dec. 31, 2010, the Fed held $1.2 trillion treasury debt, more than $892 billion treasury bond held by China, the largest foreign country treasury holder.
2. Foreign countries: Foreign countries including China, Japan and oil producer middle east coutries are the largest debt creditors to the U.S. They bought U.S. treasury bonds due to their largest foreign reserve accrued from their trade surplus to the U.S. As of January 2011, foreigners owned $4.45 trillion of U.S. debt, or approximately 47% of the debt held by the public of $9.49 trillion and 32% of the total debt of $14.1 trillion
3. Insurance companies: These include large insurance companies that have to use long term bonds to match their long term liabilities.
4. Speculators: They hold opinions that currently the long term treasury bonds can not go that low, otherwise, the economic recovery will be derailed. But they will be the first ones to dump these bonds when the inflation presure heats up.
5. 'Dumb' money: These include fund managers who are buy and hold and certainly some individual investors.

One possible cause for treasury bonds' free fall is that Fed stops buying and foreign countries can no longer absorb the treasury bonds anymore (due to trade surplus reduction or reducing the U.S. treasury and buying other countries' debts or both). By that time, speculators will flee and who will hold the bag?

Exchange Tickers (TLT), (IEF), (SHY), (SHV), (PTTRX), (LSBDX), (TGLMX), (WATFX), (MWTRX), (TGBAX), (NSTTX), (AGDIX), (FSRRX), (PRSNX), (DPGIX)

Symbols:TLT, IEF, SHY, SHV, PTTRX, LSBDX, TGLMX, WATFX, MWTRX, TGBAX, NSTTX, AGDIX, FSRRX, PRSNX, DPGIX