U.S. Treasury department’s ‘step too far’
Investors should expect the sell-off of global government bonds to continue, renowned economist Mohamed El-Erian told CNBC on Friday.
“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,” he told CNBC’s Carolin Roth at the Ambrosetti Forum in Cernobbio, Italy.
Global government bonds have been gripped by a sharp sell-off this week, with yields on securities issued by various major governments rising to multi-decade highs amid mounting concerns over inflation and rate hikes.
Bond yields and prices move inversely to one another.
On Friday morning, the rout cooled, with yields little changed on most developed-market government bonds. U.S. Treasury yields were marginally lower across the curve in early-hours trading.
El-Erian, the Rene M. Kern Practice Professor at the University of Pennsylvania’s Wharton School and chief economic adviser at Allianz, told CNBC he did not see anything wrong with how the markets were functioning – but added that “reliable buyers and holders” of U.S. Treasurys were coming under pressure.
“China, for geopolitical purposes, is no longer as willing,” he said. “Japan and the Gulf countries have domestic issues.”
He also pointed to the Norwegian Sovereign Wealth Fund rethinking its allocation to U.S. government bonds.
“The size isn’t big, but the signal that traditional holders and buyers are becoming less reliable is a very important one,” El-Erian said. “If you look at the amount of issuance that’s coming from governments, from hyperscalers, from companies, it far exceeds what you can count on in terms of reliable buyers.
“And that’s 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.”
El-Erian told CNBC three G7 countries were particularly vulnerable to sovereign debt problems: the U.K., Japan and France.
“Those by numbers, by everything else, and the U.K. in particular is what I call a high-beta country,” he said. “That every time rates move by a bit in the U.S., they move by a lot more in the U.K.”
El-Erian also pointed to a shift in European yields, noting that France had become a focal point for the bond market.
“In the old days you would worry about Italy. Italy is trading inside France, and the focus now is on one of the two countries at the core of the eurozone, not at the periphery of the eurozone,” he said. “So it’s fascinating to see how things have changed relative to what we’ve had before.”
U.S. Treasury department’s ‘step too far’
El-Erian also told CNBC on Friday that the Trump administration had gone “too far” with its attempts to intervene in market outcomes and monetary policy.
Last month, the U.S. Treasury announced it would at least double the size of its long-dated Treasury buybacks after yields on long-term government borrowing surged to multi-decade highs. On Thursday, U.S. Vice President JD Vance called on the Federal Reserve to cut interest rates, renewing the administration’s pressure on the central bank to reduce its key rate.
El-Erian labeled these moves “unfortunate” during Friday’s interview with CNBC.
“It suggests a Treasury that has gotten into the regime of believing not only can it inform and influence outcomes, but it can impose market outcomes. I think that’s a step too far,” he said. “And the question now is, how do you step back from this? I think the results are clear. It’s a massive market. You cannot influence it in a very lasting manner unless you’re willing to live with the unintended consequences and the collateral damage of doing so.”
CNBC reached out to the U.S. Treasury Department for comment.
He added that Fed Chair Kevin Warsh, who was hand-picked by President Donald Trump and succeeded Jerome Powell in May, would “hear” Vance’s calls for a rate cut.
“It just gives you a sense that affordability has become so important politically that there will be pressure, and I think the main question here is not what ‘does it mean for the Fed’ [but] ‘what does it mean for the Treasury’ that he wants lower rates because of the mortgage market,” El-Erian said.
Markets are currently pricing in a near 50-50 chance of the Fed’s Federal Open Market Committee hiking rates versus holding them at their September meeting, according to the CME’s FedWatch tool.
Warsh gets ‘three things right’ at Jackson Hole
El-Erian told CNBC that in his view, Warsh had already done “three things right” during his address at the Jackson Hole symposium last week.
“First, he addressed the concerns about his reaction function,” he said. “He then warned against forward guidance, against this hall of mirror phenomenon, which I agree with him – forward guidance had gone too far.”
“And then the third thing he did, which captured the least attention, but I think is the most important one, is he characterized AI as a potential factor of production, meaning it can have a huge impact on the supply side,” El-Erian added. “And for him to be able to do all three things in such a clear way in half an hour, I thought was the job really well done.”
About Dr Mohammad al Erian
Mohamed Aly El-Erian , 68, is an Egyptian-American economist and businessman. He was President of Queens’ College, Cambridge, and chief economic adviser at Allianz, the corporate parent of PIMCO where he was CEO and co-chief investment officer(2007–14). He was chair of President Obama’s Global Development Council (2012–17), and is a columnist for Bloomberg View, and a contributing editor to the Financial Times.
Since 2014, he has been on the panel of experts that judged and selected the Financial Times/McKinsey Business Book of the Year.
El-Erian worked for several years at PIMCO as a managing director and head of the emerging market portfolio team, where he earned notoriety by avoiding the 2001 bond default by Argentina that otherwise stung the international bond market.
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