Pimco is to cut its holdings of UK and US government debt as the two countries are increasing their borrowing to record levels.

Pimco, the world's largest bond fund manager headed by Bill Gross, also expects a fall in central bank buying of this debt, which will give rise to negative supply and demand dynamics.

In contrast, Pimco's managing director Paul McCulley, has said they will remain 'modestly bullish' on Eurozone debt which 'won't face the same degree of reduction in central bank duration buying' this year.

They are a bit 'more cautious' with corporate bonds and expect more value from carefully selected high-quality credits.

'We believe that corporate spreads are still at levels where we see value in carefully selected high-quality credits, particularly in bank and non-bank financials and non-cyclical sectors, such as utilities and healthcare. In high yield corporate, we are adding very select names in telecoms and energy pipelines,' he said.

Pimco will also favour emerging market sovereign debt, said McCulley. 'The Dubai panic gave us additional legroom to enter into these trades. We are also adding to positions in EM corporate bonds.'

However the bond manager has concerns over the relationship between the Chinese yuan and the US dollar, 'If China refuses to let the yuan appreciate, essentially maintaining too easy of a monetary policy for itself and the developing countries that shadow Chinese policies. This would create bubble risk, particularly for assets such as emerging market (EM) equities and commodities,' McCulley said.

David Fuller's view With the Fed and BoE buying most of the US Treasury and UK Gilts issues month after month, there is only one scenario under which long-term rates would not rise once the central banks complete this form of quantitative easing.

Basically, for UK 10-Year Yields (monthly & weekly) to retest their lows just beneath 3%, investors would need to anticipate once again the economic depression scenario briefly feared during 1Q 2009. The same would apply to US 10-Year Yields (monthly & weekly) which bottomed at yearend 2008, just above 2%. While I will be guided by the chart action, I see no reason why this should happen, given all the quantitative easing that has occurred. Moreover, I see no technical action to suggest that long-dated yields will fall significantly.

Instead, I expect long-dated yields to rise over the medium to longer term, although they may temporarily back away from the 4% level before eventually moving higher, reaching at least 5%.

If correct, this would theoretically make 10-Year T-Bonds and Gilts attractive short-sale candidates. A number of institutional traders, not least hedge fund managers, also hold this view. However these trades are complicated by the presence of large, insider participants in the form of central banks, anxious to prevent yields from rising too quickly. They have deep pockets as a consequence of their unique freedom to print money.

The Fed and BoE would happily lure speculators into helping them to finance the purchase of their government paper. Consequently, they almost certainly attempt to squeeze shorts from time to time, as the choppy chart action suggests. Therefore timing is critical. For those wishing to short long-dated US and UK debt, I would avoid upside momentum moves in yields and aim to establish shorts within the lower half of the ranges evident. Since one would be using futures, this would mean selling after price rallies towards prior resistance, and either covering on tests of prior support or any evidence of a loss of downside momentum for bond prices.