Bill Gross of PIMCO is concerned for the US government. To him, the big question is who will buy US Treasuries (i.e. lend to the US government) once the Federal Reserve stops buying them through its second round of quantitative easing (QE2).

Previously, the Federal Reserve bought 10 percent of the Treasuries issued, foreign central banks bought about 50 percent, and the private sector (funds and banks) bought the remaining 40 percent.

Now, with QE2 in full swing, the Federal Reserve is buying 70 percent of Treasuries issued in this period while the foreign central banks are buying the remaining 30 percent.

When QE2 ends (assuming there is no QE3) on June 30, 2011, who will fill the gaping buying demand left by the Fed?

Gross thinks foreign central banks with trade surpluses with the US will continue to buy – about $500 billion worth annually. However, as for the private sector, banks are lending instead of buying Treasuries and bond funds are receiving too much inflows, so they probably can’t make up for the Fed's entire 70 percent.

Of course, Gross points out that at the right price, there will always be a buyer for Treasuries.  In fact, his firm PIMCO may even be among them.

The real question what that price is.

On this matter, Gross isn’t entirely sure. However, he leans to the pessimistic side and fears the cost may be significantly higher. If so, the US economy, the bond market, and the stock market will all likely be shaken.

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