Rates on three-month US Treasury Bills turned negative last week for first time since debt selling began in 1929

The world's biggest bond fund manager, Pimco's Bill Gross, believes the next asset bubble set to burst could be US Treasuries.

"Treasuries have some bubble characteristics, certainly the Treasury bill does," Gross says. "A Treasury bill at 0% is overvalued. Who could argue with that in terms of the return relative to the risk? There is no return."

The US Treasury sold $30bn of four-week bills on 9 December through an auction at 0%, while three-month bill rates turned negative for the first time since the US began selling the debt in 1929.

Gross expects the Federal Reserve to cut its target rate to 0.5% when policy makers meet next week and will likely signal that interest rates will remain low for a "considerable" period of time.

"There is some risk for the dollar to weaken," says Gross. "Certainly the government and the Fed cannot continue to talk about expansion of the Fed's balance sheet without the risk of the dollar going south."

Gross told Bloomberg he regrets not buying Treasuries in what is shaping up to be the best year for US government debt since 2000.

"If we went back 12 months and knowing what we know now, it would have been all invested in Treasuries. The question going forward is 'Is it the winner over the next 12 to 24 months?' We don't think so," he said.

Treasuries of all maturities have returned 11.9 % this year, according to Merrill Lynch's US Treasury Master Index, the best performance since the securities gained 13 % in 2000.

Gross says he continues to invest in corporate debt backed by the US government, including the debt of American Express Co and Sallie Mae Inc. He said Treasury Inflation Protected Securities represent "one of the best values" for investors seeking high-quality debt "once this delevering process winds down."

The leading economic consultancy, GaveKal, whose contributors include The Times' economics commentator Anatole Kaletsy, issued a note to its clients, including leading hedge funds, last week entitled 'Three Reasons to Sell US Treasuries.'

It said: "As we go about and meet with clients around the world, we are typically asked: 'I just don't get it! The Fed is out there printing US$ as if paper and ink were about to run out, yet the dollar surges, oil plummets, gold sucks wind and gold mining shares collapse and yields on long dated US government bonds reach levels I had never thought I would see in my lifetime! How does this all add up? It makes no sense!'"

GaveKal outlined a number of reasons for the bubble including investors being 'forced buyers' of US Treasuries and concluded: "As we see it, (there) are three possible explanations to the dilemma. Whichever option you to go with, it will tell you getting out of government bonds today is not only necessary, but could be urgent.'

It issued its note on Thursday 11 December - the same day Jim Rogers told Reuters he has been using the rally in the US dollar as an opportunity to exit assets denominated in the US currency.

Speaking at the Reuters Investment Outlook Summit 2009 in New York Rogers said the rally is a reversal of a "gigantic short position" accumulated over several years and not a result of a fundamental bet.

"I plan to get out of all of my US dollars at some time throughout this rally," he said. "The dollar is a terribly flawed currency, and perhaps a doomed currency.

"I've driven around the world looking for a sound currency. There aren't any... but the yen is the only thing that's going to go up for a while," he added.

Paul Lambert, manager of Polar Capital's Discovery fund says: "I can see why there is a fear of what we are seeing in the bond market.

"That is because we have moved to unprecedented prices, some believe yields can only go one way and the bears can identify the mechanism that will reverse the trend, ie inflation.

"Of course it's more risky buying bonds now than when yields were 100 or 200bp higher. But time will tell whether it's a bubble.

"If inflation stays low because of a defunct banking system then maybe bonds are not bubble-like but still good value. Bubble? Maybe, but possibly just discounting the future.," he adds.