The Fed is responsible for turmoil in the bond market and needs to taper its asset purchases sooner, Mohamed El-Erian says


Mohamed El-Erian, chief economic adviser of Allianz.

  • Fault for Tuesday’s spike in Treasury yields lays at the Fed’s feet, Mohamed El-Erian wrote in a an op-ed.
  • His comments came just after the 10-year Treasury yield spiked to 1.5%, hitting a three-month high.
  • El-Erian said the Fed needs to think hard about its timetable for tapering asset purchases.
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Fault for Tuesday’s sharp rise in Treasury yields lays at the Fed’s feet and should prompt a rethink of its taper timeline, Mohamed El-Erian wrote in a Financial Times op-ed on Wednesday.

The Queens’ College President and economist warned that increasingly volatile Treasury markets could spill over into other financial sectors, threatening the real economy.

“The more rate volatility increases, the greater the risk of yields suddenly ‘gapping’ upwards,” El-Erian wrote. “The greater the gapping, the bigger the threat to market functioning and financial stability, and the higher risk of stagflation – the combination of rising inflation and low economic growth.”

His comments came just after the 10-year Treasury yield spiked to 1.5% from 1.3%, hitting a three-month high.

El-Erian said that bond yields, often called the most crucial market signal in the world, have long been driven mainly by central banks. Their massive asset purchasing programs, known as quantitative easing or QE, have “distorted” markets and made price signals less valuable.

A frequent Fed skeptic in recent months, El-Erian said the US central bank needed to think hard about its timetable for tapering asset purchases, which it last week signaled would begin near the end of the year.

“On the contrary, the longer the Fed waits, the more markets will question its understanding of ongoing inflationary pressures,” he warned, adding that any resulting market disorder would risk “undermining a recovery that needs to be strong, inclusive and sustainable.”

El-Erian, who has served in a variety of high-powered roles, rose to prominence as the top deputy to Pimco “bond king” Bill Gross before a public fallout in 2014.



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