Global government bond yields surged to multi-year and multi-decade highs this week, with the U.S. 10-year Treasury yield reaching its highest level since November 2023. Economist Mohamed El-Erian told CNBC the sell-off is likely not over yet, pointing to fading demand from traditional buyers and a U.S. Treasury response he called too aggressive.
Bond yields across major economies climbed sharply this week, and Mohamed El-Erian expects the pressure to persist. Speaking to CNBC's Carolin Roth at the Ambrosetti Forum in Cernobbio, Italy on Friday, El-Erian said he expects the sell-off of global government bonds to continue, because he sees no near-term U.S. fiscal consolidation. According to CNBC, El-Erian said: "will continue to see upward pressures on yields"
Yields climb to multi-decade highs
The U.S. 10-year Treasury yield climbed to its highest level since November 2023 this week, while Japan's 10-year government bond yield moved above 3% for the first time since 1996. U.K. 10-year Gilts hit a post-2008 high, and German 10-year bund yields rose to levels not seen since 2011.
Yet the rout cooled by Friday morning. Yields were little changed on most developed-market government bonds, with U.S. Treasury yields marginally lower across the curve in early trading.
Traditional buyers step back
El-Erian said the sell-off has more to do with a fundamental imbalance between issuance and reliable buyers than with inflation or Fed credibility. He said China is no longer as willing a buyer for geopolitical reasons, while Japan and the Gulf countries face domestic issues. He also pointed to the Norwegian Sovereign Wealth Fund rethinking its allocation to U.S. government bonds.
Among G7 economies, El-Erian named the U.K., Japan and France as particularly vulnerable to sovereign debt problems, describing the U.K. as a country where U.S. rate moves translate into larger domestic swings. He added that France has become a focal point for bond markets, with Italy now trading inside France.
Treasury's market intervention called too aggressive
El-Erian also criticized the Trump administration's efforts to influence bond markets, after the U.S. Treasury said last month it would at least double the size of its long-dated Treasury buybacks. He argued a Treasury that believes it can impose market outcomes has gone too far, warning that a market this large cannot be influenced without unintended consequences.
Markets are currently pricing a near 50-50 chance of the Fed's Federal Open Market Committee hiking rates versus holding them at its September meeting, according to the CME's FedWatch tool. That comes as some investors argue deglobalization and geopolitical fragmentation could keep inflation structurally higher than during the 2010s.
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