Economist Mohamed El-Erian warned that markets “will continue to see upward pressures on yields,” suggesting the global government-bond sell-off may not be over.
The ‘Reliable Buyer’ Problem
Global government bonds have seen a sell-off this week, with yields on securities issued by several major governments surging to multi-decade highs amid concerns over inflation and rate hikes. Speaking at the Ambrosetti Forum, El-Erian told CNBC that historically "reliable buyers and holders" of U.S. Treasuries are actively retreating.
“I don’t see any appetite in the U.S. for immediate fiscal consolidation. So I suspect we will continue to see upward pressures on yields," El-Erian noted.
The U.S. national debt has surpassed $40 trillion.
"China, for geopolitical purposes, is no longer as willing," El-Erian explained, adding that "Japan and the Gulf countries have domestic issues.”
El-Erian also highlighted that the Norwegian Sovereign Wealth Fund is reevaluating its allocations to U.S. bonds. While the raw volume may not be massive, the economist stressed that "the signal that traditional holders and buyers are becoming less reliable is a very important one.”
El-Erian noted that the volume of new debt issuance from governments and corporations currently "far exceeds what you can count on in terms of reliable buyers.”
He added that is why there’s been pressure on interest rates. “It has much more to do with a fundamental imbalance than it has to do with inflation or Fed credibility or the other reasons that have been cited,” said El-Erian.
Vulnerable G7 Economies
El-Erian also pointed out that the U.K., Japan and France were vulnerable to sovereign debt problems.
The ripples of this U.S. debt imbalance are now visible in the U.K., Japan, and France. El-Erian categorized the U.K. as a "high-beta country," noting that every time rates move by a bit in the U.S., “they move by a lot more in the U.K.”
Europe’s bond market dynamics are also in focus. Historically, the market worried most about peripheral nations like Italy, but anxiety has recently pivoted to the core.
"Italy is trading inside France, and the focus now is on one of the two countries at the core of the eurozone," El-Erian observed.
How Have Stocks and Bonds Performed?
At the last check, the 30-year Treasury bond yielded 5.24%, the 10-year Treasury bond was at 4.76%, and the two-year bond was at 4.35%.
The primary ETF specifically tracking the long end of the U.S. Treasury yield curve—including the 30-year benchmark bond—is the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT), which closed 0.15% higher at $82.07 on Thursday. It was down 6.59% year-to-date, down 0.15% over the last month and 5.2% over the last year.
The S&P 500 index has advanced 13.18% year-to-date. Similarly, the Nasdaq Composite index was up 14.38%, and the Dow Jones gained 11.7% YTD.
On Thursday, the SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 and Nasdaq-100, respectively, closed higher. The SPY was up 1.05% to $773.17, while the QQQ advanced by 1.19% to $717.67. Meanwhile, the Dow tracker, State Street SPDR Dow Jones Industrial Average ETF Trust (NYSE:DIA), also ended 1.19% higher at $536.93.
During pre-market on Friday, SPY was down 0.27%, QQQ edged 0.03% lower, and DIA declined 0.33%.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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