Pacific Investment Management, or Pimco, the world's biggest bond fund, is cutting back its interest rate exposure in the US and UK, citing its worries about the sheer scale of public borrowing by these countries’ governments, media reports said.

Managing director Paul McCulley reportedly said the supply/demand balance for US and UK government debt was likely to suffer as governments stepped up borrowing, and as buying by central banks eventually declined.

"We're probably going to have a $1.4 trillion deficit this year without the Fed on the buy side of the market for duration," he said of US Treasuries.

"There is major uncertainty about how the supply/demand equation for duration will resolve itself when the Fed is out of the picture,” he said.

The ballooning public deficits of the US and UK governments, among some others, has triggered warnings that international investors will avoid such debt, forcing up interest rates in these countries, hitting their chances of a recovery. Rating agencies have already made warnings about the UK’s credit rating outlook, for example.

But Pimco remains "modestly bullish" towards interest rate exposure in the euro zone, which has not expanded fiscal policy so aggressively, and where central bank buying of longer-term debt will not shrink so much in 2010, Mr McCulley added.