"There should be little doubt that simply holding Treasuries at these yield levels for an extended period of time represents an abdication of responsibility," Bill Gross, who runs the $240.7 billion Pimco Total Return Fund, wrote in his monthly investment outlook letter. Bond investors "are being shortchanged by 1% to 2% annually compared to historical norms," he wrote.

Gross, who is also the co-chief investment officer at Newport Beach, Calif.-based Pacific Investment Management Co., began to bet against U.S. government-related debt in March and made cash the largest holding of the Total Return Fund.

S&P put a "negative" outlook on the U.S. AAA credit rating April 18, saying there's a one-in-three chance of a downgrade unless lawmakers agree on a plan by 2013 to reduce budget deficits and the national debt. Congress is debating raising the government's $14.29 trillion limit, which the Treasury predicts will be reached this month.

Demand Sustained

So far, there's been no sign of waning demand. Treasury has received $2.97 in bids for every dollar auctioned this year, little changed from last year's record $2.99, Treasury data show. The U.S. has sold $713 billion of notes and bonds this year, compared with $812 billion at this time in 2010.

Purchases are being helped by commercial banks buying U.S. government securities at the fastest pace since July, or $68 billion over the past two months, boosting their total stake to $1.683 trillion, Fed data show.

The Fed has also been the dominant buyer of Treasuries sold at recent auctions, making the central bank the world's biggest holder of U.S. government debt. More than 36% of the Treasuries the Fed bought in March were issued within the previous 90 days, up from 15% in November, according to Bank of America Merrill Lynch.

International demand is also picking up. The Fed's holdings of U.S. government debt on behalf of foreign central banks and institutional investors jumped to $2.691 trillion as of May 4, up 3.58% from this year's low of $2.598 trillion on Jan. 19. That compares with no change in the previous 11 weeks.

Bearish To Neutral

The most bearish primary dealer, Morgan Stanley, as well as Goldman Sachs Group Inc., has dropped recommendations to bet against Treasuries as economic growth slows.