Wild bond market moves show loss of anchors
New York | 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,” said Mr El-Erian, the chief economic adviser at Allianz. “What we are seeing is this enormous volatility. So far, we are lucky that when we have overshoots it triggers some sort of reaction.”
Fed officials have been determined to rein in inflation and bring it back down to their 2 per cent target. But El-Erian said there is a “danger” in trying to get it to that level too quickly. AFR
It’s been a week for the Treasury market books, said Mr 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 per cent for 10-year Treasuries.
On Friday, 30-year yields fell amid mounting geopolitical tensions, unwinding part of the previous session’s rally.
At 2.21pm in New York on Friday (3.21am AEDT), the yield on the 10-year note had fallen 7 basis points to 4.63 per cent. The 30-year was yielding 4.78 per cent.
“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 raise 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 per cent — from closer to 30 per cent 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 per cent target. But Mr 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.
Bloomberg
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