The rout in the US government bond market can be attributed to the absence of all of its anchors, according to Mohamed El-Erian.
“We have lost the economic anchor. We have lost the technical anchor and we have lost the policy anchor,” El-Erian, the chief economic adviser at Allianz SE and a Bloomberg Opinion columnist, said on Bloomberg Television Friday. “What we are seeing is this enormous volatility. So far, we are lucky that when we have overshoots it triggers some sort of reaction.”
It’s been a week for the Treasury market books, said El-Erian. In the first part, yields moved lower on dovish speak from Federal Reserve officials. By Wednesday, yields shifted higher on concerns of sticky inflation, reiterated by a hotter-than-forecast consumer price index reading on Thursday. That same day, the market had its worst day since March 2020 by one measure, when the 30-year Treasury yield rose as much as 19 basis points, stoking fears of new milestones, including a yield of 5% for 10-year Treasuries. On Friday, 30-year yields fell amid mounting geopolitical tensions, unwinding part of the previous session’s rally.
“There is a lot of question marks about these narratives that have settled into the market; don’t worry, the Fed will have to do less because the markets will have to do more. It doesn’t quite work that easily. It is a very complicated market outlook,” he said. “The major financial stability risk right now is the unusual volatility. It tends to break things. That’s what we have seen in the past. So far, the financial system has been incredibly resilient, and we should all be thankful for this.”
This leaves the question of whether the Fed will hike rates in their final two policy meetings of this year. Swap contracts pushed the odds of another quarter-point Fed hike in November to about 40% — from closer to 30% on Wednesday. While swap contracts continue to anticipate a Fed pivot to rate cuts next year, that outcome was assigned somewhat lower odds.
Fed officials have been determined to rein in inflation and bring it back down to their 2% target. But El-Erian said there is a “danger” in trying to get it to that level too quickly. He hopes that the Fed keeps its current benchmark interest rate unchanged this year for the sake of economic stability.
This article was provided by Bloomberg News.
