(Bloomberg) — The problems facing the U.S. government bond market may be due to the absence of all the anchors, according to Mohamed El-Erian.
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“We have lost our economic anchor. We’ve lost the technical anchor and we’ve lost the policy anchor,” El-Erian, chief economic adviser at Allainz SE and a Bloomberg opinion columnist, said on Bloomberg Television Friday. “What we’re looking at is this huge volatility. So far, we’ve been lucky that there’s been some kind of reaction when we’ve had overshootings.
It’s been a week for Treasury market books, El-Erian said. In the first part, yields fell on dovish talk from Federal Reserve officials. On Wednesday, yields turned higher on concerns about sticky inflation, echoing Thursday’s consumer price index reading. On the same day, the market had its worst day by one measure since March 2020, when the 30-year Treasury yield rose as much as 19 basis points, sparking fears of new rises, including a 5% yield for 10-year Treasuries. On Friday, the 30-year yield fell amid geopolitical tensions, partially unwinding the previous session’s rally.
“There are a lot of question marks about these narratives in the market; don’t worry, the Fed has to do a little because the markets have to do a lot. It’s not going to be that easy. It’s a very complicated market view,” he said. “The main risk to financial stability right now is abnormal volatility.” They tend to break things. That’s what we’ve seen in the past. So far, the financial system has been remarkably resilient, and we should all be grateful for that.
This leaves the question of whether the Fed will raise rates in the last two policy meetings this year. Swap contracts pushed the odds of another quarter-point Fed hike in November to 40% – up from 30% on Wednesday. As swap contracts continue to anticipate the Fed’s privy to rate cuts next year, that outcome is given somewhat lower odds.
Federal officials are determined to keep inflation under control and return to their 2% target. But there is a “danger” in trying to get El-Aria to that level too quickly. In the interests of economic stability, the Fed hopes to keep interest rates unchanged this year.
–With assistance from Ye Xie and Charlie Zuza.
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