In the month of May, we saw bond giant PIMCO officially dump U.S. Treasuries from its portfolio. Since then, PIMCO’s chief, Bill Gross, has been warning that the U.S. is on the verge of a debt default.

Wondering who will be around to purchase up Treasuries once the Fed’s QE2 program had ended, the firm has decided to take action. Yesterday, PIMCO announced that it was committing 3% of its portfolio towards a bet against Treasuries, or $7.1 billion short Treasuries.

Lately, Gross has been quite the negative voice regarding Treasuries, so the announcement that the world’s largest bond manager is now short isn’t exactly ‘out of the blue’. However, that’s not to say that it doesn’t have investors taking a second look at the Treasury market.

Gross said in his April commentary that he believes 75% of the government’s budget to be based on entitlements such as Medicare, Medicaid, and Social Security, as well as non-discretionary spending items. He believes that unless entitlements are cut, the government will default on its debts, though not in the ‘normal’ way of halting principal or interest payments. He wrote that default could occur, “surreptitiously via accelerating and unexpectedly higher inflation . . . deceptively via a declining dollar -- currently taking place right in front of our noses . . . and stealthily via policy rates and Treasury yields far below historical levels -- paying savers less on their money and hoping they won’t complain.”

Gross has made a fortune in the great bond bull market over the years, so being short US Treasuries for a manager of his stature is a big deal. Gross, who manages the $236-billion Pimco Total Return bond fund, is most concerned about what will happen to bond markets once the Fed’s QE2 program concludes on June 30, a day in which he has dubbed “D-Day.”

Some analysts aren’t convinced that PIMCO’s short Treasury move is based on the long-term expectation of the government defaulting, rather the short term effects that QE2’s end will have on bond yields. “Whether bond yields rise or fall after the current QE program is completed will depend on a host of factors. Chief among them will be market expectations regarding the outlook for economic growth and inflation, and expectations regarding the next move in Fed policy,” reads a note from HSBC’s global research team.

PIMCO’s other chief investment officer, Mohammed El-Erian, said that the company could be buyers of Treasuries under the “right conditions.” Considering the aftermath of the UK’s 2009 QE program, which ultimately ended in a double dip in yields after an initial jump following the end of the program, PIMCO could be setting itself up for some quick profit-taking should the same initial spike in yields occur.

PIMCO is positioning itself for the end of QE2. Whether it takes profits on a spike in yields, or holds out short on treasuries longer term, one thing is for certain – the end of QE2 will have a significant impact on our economic landscape. While this past year has been all about macro headlines (European solvency issues, QE2, turmoil in the Middle East, Japan’s earthquake), moving forward, the investment community will likely put more emphasis on inflationary expectations, yields, interest rates, and other domestic economic issues.