PIMCO says it still likes UK gilts, chances of fiscal contraction growing

By Harry Robertson

LONDON, Jan 9 (Reuters) - PIMCO, one of the world's largest bond investors, said it is still positive about UK government bonds amid a steep market-sell off, adding that much of the increase in yields has been driven by the U.S. Treasury market.

The $2 trillion asset manager said the chances are rising that British finance minister Rachel Reeves will have to find new savings as a result of the rise in borrowing costs.

"Although UK-specific factors, such as the budget, have contributed to the rise, most of the increase has been driven by rises in U.S. Treasury yields during the same period," PIMCO economist Peder Beck-Friis told Reuters late on Wednesday.

Britain's benchmark 10-year government bond yield on Thursday touched 4.925%, its highest since 2008, and has risen more than 20 basis points in three days.

"Both weaker growth and higher interest rates put pressure on public finances," Beck-Friis said.

"If the current trends of rising yields and slowing growth persist, the chances of spending cuts or tax increases will increase for the government to adhere to its new fiscal rules."

Many asset managers such as PIMCO went into the new year with a positive view on gilts, believing slowing growth will mean the Bank of England cuts interest rates by more than expected. (Reporting by Harry Robertson; editing by Dhara Ranasinghe)