With borrowing in the U.S. and the U.K. at record levels, deficit concerns have prompted PIMCO to pare back its exposure to corporate bonds, Treasury Inflation Protected Securities and mortgage-backed securities. This is according to the 2010 investment outlook that PIMCO Portfolio Manager Paul McCulley recently issued.

“This leaves us with portfolios that appear, more than at other times, to be hugging the benchmarks with no bold positioning,” McCulley wrote. “We’re making a very active decision to run light on risk.”

Instead, PIMCO is favoring sovereign debt, foreign corporate bonds, currencies in emerging markets, Build America Bonds and municipal bonds, McCulley said.

PIMCO is also warning investors the market could sink dramatically as soon as the Federal Reserve raises rates. “The moment the Fed changes any one of its words, it’s going to be a very unpleasant experience,” McCulley said.

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