El-Erian told CNBC that elevated yields will be a feature for the rest of the year as governments and hyperscalers seek funding while reliable bondholders and buyers step back.

  • El-Erian warned the big danger is interest-rate risk becoming equity and credit risk.
  • He drew parallels with the 1980s, saying policymakers are responding with monetary tightening rather than fiscal containment.
  • El-Erian said the equity market has a huge shield called earnings, which has so far deflected the energy, interest-rate and low-income consumption shocks.

Mohamed El-Erian, chief economic adviser at Allianz, said he believes the 10-year Treasury yield will remain around 5% even if oil prices fall, citing a longer-term imbalance between bond supply and demand.

“We’re not going back to 4.5% or 4.25% simply because there’s too much of an imbalance in the supply and demand,” he told CNBC.

El-Erian said the market would still be having the current yield discussion even if oil prices were lower because there is “an imbalance in longer-term demand for bonds and longer-term supply of bonds.”

U.S. stocks fell on Monday as Treasury yields continued to climb higher and higher crude oil prices pressured sentiment. The Dow fell about 360 points on open, while the S&P 500 slipped 0.49% and the Nasdaq Composite slid 0.50%.

‘Elevated Yields’ To Remain A Feature

According to El-Erian, hyperscalers and governments are seeking large amounts of funding, while reliable bondholders and buyers are stepping back.

The gap is being filled by short-term money, which needs to be compensated more, he said, adding that every time oil prices rise, that short-term money demands even more compensation.

“So volatility will be a feature, and elevated yields will be a feature for the rest of the year,” El-Erian told CNBC, adding that the “big danger” is that interest-rate risk becomes equity and credit risk.

El-Erian said policymakers are responding to the situation with monetary tightening rather than fiscal containment, drawing parallels with the policy mix of the 1980s.

Earnings Remain ‘Huge Shield’ For Equities

El-Erian said earnings have so far protected the market from several pressures. “The equity market has a huge shield. It’s called earnings,” he said.

The shield has deflected the energy shock, the interest-rate shock and the low-income consumption shock. “As long as that shield remains strong, then the equity market will live in its own space,” he said, adding that the shield is “getting a lot of pressure right now.”

El-Erian also rejected the idea that higher rates would slow data center growth. “It’s not going to slow the growth of data centers,” he said, adding that there is excess demand and that those projects can secure financing.

Instead, he said higher rates will slow interest-rate-sensitive sectors, including housing and autos, and lead to more discussion about the K-shaped economy.

The SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was down around 0.33%; the Invesco QQQ Trust ETF (QQQ) fell 0.61%; and the SPDR Dow Jones Industrial Average ETF Trust (DIA) fell 0.56%.

See Also: Dow Slips Over 350 Points, Nasdaq And S&P 500 Also In The Red As Treasury Yields, Crude Oil Prices Rise
For updates and corrections, email newsroom[at]stocktwits[dot]com.<