Lucy Nicholson/Reuters
- The Treasury bond market is headed for an unknown destination, Mohamed El-Erian wrote in the Financial Times.
- "The US bond market is losing its strategic footing, whether in economics, policy, or technical aspects."
- Treasury resilience may be at risk if key anchors are not reestablished.
The Treasury bond market is headed for the unknown as it sheds key anchors, economist Mohamed El-Erian wrote in the Financial Times.
The recent volatility that rocked bond yields into sudden extremes goes beyond the latest reports on inflation or policy stances from Federal Reserve officials, the chief economic adviser to Allianz added.
"The US bond market is losing its strategic footing, whether in economics, policy, or technical aspects," he said.
Currently, long-term Treasury yields are hovering near 5% amid a massive US bond sell-off, due in part to a strong US economy that will require extended tightening to further rein in inflation.
This also comes as the US ran a $1.7 trillion deficit in fiscal year 2023, with the Treasury Department issuing a massive supply of bonds. And the Isreal-Hamas war has added to geopolitical worries that have contributed to the rollercoaster ride Treasurys are on.
"But my primary concern lies elsewhere: the most influential segment of the world's financial markets is losing its longer-term strategic anchors and is at risk of losing its short-term stabilizer ones as well," El-Erian said, raising doubt about who will absorb the additional supply of US debt.
He noted that the Fed is no longer purchasing Treasurys and is instead shrinking its balance sheet, foreign buyers have turned more hesitant, and US institutional investors already have big paper losses on bond holdings, while banks may have to sell bonds to replenish declining deposits.
Short-term investors have held back even more extreme day-to-day volatility, El-Erian said, as peaking yields have been attracting some level of buyers, especially households investors. But the continued resilience of the bond market is not something investors should take for granted, he warned.
"No matter how you look at it, the world's most crucial benchmark market is on an unpredictable journey with an uncertain destination," he said.