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By Abhinav Ramnarayan
LONDON, March 5 (Reuters) - The chances of a cooperative outcome to Britain’s divorce talks with the European Union have improved in the past two weeks, PIMCO’s global fixed income CIO Andrew Balls said, reinforcing his view that British Gilt yields look too low.
Balls, in comments cleared for publication on Tuesday, added that British banks look attractive and that there is more upside potential for sterling.
PIMCO, one of the biggest bond investors in the world with $1.66 trillion of assets under management at the end of last year, has some positions in sterling and has been adding UK banks to its portfolios, he said.
“Our expectation has been for a cooperative outcome, avoiding the chaotic no-deal Brexit,” Balls told Reuters. “In the last week or two, we are seeing now there seems to be further movement in that direction.”
PIMCO portfolio managers have argued that an amicable Brexit outcome would allow the Bank of England to raise rates further, thereby pushing Gilt yields higher.
That said, Balls believes Gilt yields are too low almost irrespective of the outcome, particularly when you compare 10-year UK yields of 1.28 percent with the U.S. equivalent, which stood at 2.73 percent on Tuesday.
“I would tend to want to get paid more to invest in the UK than I do in the U.S., not 50 percent in terms of the yield,” he said.
Instead, U.S.-based PIMCO has been adding positions in UK banks, which look capitalised enough to withstand any shocks from Brexit.
“The Bank of England stress tests have been pretty draconian and even in the worst kind of (Brexit) outcomes that you could think of, the capitalisation of the UK banks looks pretty attractive,” Balls said.
He added that there was room for further strengthening in sterling, both from a traditional valuation model and from looking at where the British currency was trading before the June 2016 Brexit referendum.
Sterling was trading at around $1.3172 on Tuesday, well above recent lows but a good distance from the $1.50 level of June 24, 2016. (Reporting by Abhinav Ramnarayan Editing by Dhara Ranasinghe/Mark Heinrich)