NEW YORK (Reuters) - The world's largest bond fund's loss may eventually be the U.S. Treasury market's gain.
Treasuries could build on Wednesday's price rise after news that Bill Gross's $236.9 billion PIMCO Total Return fund (PTTRX.O) has gotten rid of all of its U.S. government debt.
"We have the market's flagship bond fund registering zero percent Treasuries to start March and undoubtedly others leaning the same way," said David Ader, head of government bond strategy at CRT Capital in Stamford, Connecticut.
"In general, such a fund faces the same tyranny of zero percent the Federal Reserve faces with the funds rate, in that you can't go below that, and so once the sellers are done, you're left with the next marginal flow being a buyer and perhaps having an exaggerated impact," Ader said.
Treasuries were stronger on Wednesday, with a safety bid over peripheral European debt concerns and after solid demand in a 10-year Treasury notes auction.
Benchmark 10-year notes traded 22/32 higher in price to yield 3.47 percent, down from 3.55 percent late Tuesday.
Treasuries started the day on a stronger note in safe-haven buying on peripheral European nations, including Portugal, paying untenably high yields to sell debt. The sale increased pressure on European Union to solve the region's debt crisis.
"The potential for some sort of a domino effect, the effect on banks if there were to be some sort of a default or further price erosion in the southern European countries and Ireland, left Treasuries catching a safety bid here," David Dietze, chief investment strategist at Point View Financial Services in Summit, New Jersey.
Treasuries extended gains after the sale of $21 billion of reopened 10-year notes brought a high yield that was below market expectations, indicating aggressive bidding for the securities.
"Today's 10-year auction showed continued strong demand for the sector via the auction process," said John Briggs, Treasury strategist at RBS in Stamford, Connecticut. "There were some concerns that with Japanese year end looming, foreign participation would hamper this auction."
Trading volumes have declined this week as political upheaval in the Middle East and North Africa stoked oil prices and made investors reticent to hold positions.
The fallout from the overseas upheaval could eventually push big market players like PIMCO's Gross to move back into Treasuries, Point View's Dietze said.
"Given how long it takes a huge holder in the Treasuries market like Gross to move his merchandise, I actually feel a little more sanguine about the market knowing that he is out of it and no longer can be selling," he said. "If high energy prices keep moving up perhaps the next move might be for him to go in, and that could cause the market to get a bid."
Five-year notes on Wednesday traded 11/32 higher in price to yield 2.15 percent, down from 2.22 percent late Tuesday, while 30-year bonds rose a point in price to yield 4.61 percent, down from 4.67 percent.
Bonds pared early gains on Wednesday after the Fed bought $6.69 billion of Treasuries, most maturing on February 29, 2016.
"The buyback might have been a bit of a disappointment. Whenever you see (the Fed buying) all into one issue, it is not normally looked at as a high-quality buyback," said Ray Remy, head of U.S. fixed income at Daiwa Securities in New York.