NEW YORK (Reuters) –
Rising fears of a possible debt default at a Dubai state-owned conglomerate is the catalyst for an "overdue correction" in equities and risk assets, the chief executive of top bond fund manager Pimco said in an interview on Friday.

"Dubai is serving as a catalyst for an overdue correction in risk assets that have been supported by liquidity rather than fundamentals," CEO Mohamed El-Erian told Reuters. "While many have acknowledged in the last few weeks the growing wedge between market valuations and economic and corporate realities, few have been willing to take their equity exposure down. Dubai is changing all of this.

El-Erian oversees more than $940 billion in assets under management at Pimco.

Equity markets came under severe pressure on Thursday after news that Dubai World, the government investment company burdened by $59 billion in liabilities, sought to delay repayment of some debt.

U.S. stock markets, which were closed Thursday for the U.S. Thanksgiving Day holiday, fell on Friday. The Dow Jones industrial average (.DJI) dropped 154.48 points, or 1.48 percent, at 10,309.92, while the Standard & Poor's 500 Index (.SPX) was down 19.14 points, or 1.72 percent, at 1,091.49.

"We had taken down risk exposures in the last few weeks through sales of credit and spread products and, correspondingly, increased our holdings of Treasuries and other high quality names," El-Erian said.

Other investors were playing defense as well. The benchmark 10-year U.S. Treasury note was up 16/32, with the yield at 3.207 percent, while the two-year U.S. Treasury note was up 3/32, with the yield at 0.687 percent. At the longer end of the yield curve, the 30-year U.S. Treasury bond was up 12/32, with the yield at 4.2116 percent.

Overall, the underlying characteristics of the Dubai announcement are similar to those facing commercial real estate in other countries, including the United States and Britain, he said.

"There will be contagion to many markets, especially in the emerging world where we are witnessing broad-based sell-offs among names with very different financial characteristics."

This is especially evident in the Middle East where risk spreads have widened for all names in the Gulf even though they share none of Dubai's vulnerable debt characteristics, El-Erian explained. "With time, this will provide interesting opportunities for investors," he added.

(Reporting by Jennifer Ablan; Editing by Chizu Nomiyama)

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