Tags: El-Erian | Fed | risk | taper

Pimco's El-Erian: Fed Taper Would Take 'Safety Net' From Risk Assets

By    |   Thursday, 21 November 2013 11:58 AM

The Federal Reserve's determination to taper its quantitative easing (QE) puts more risk in risk assets, such as stocks, says Pimco CEO Mohamed El-Erian.

"The safety net, the safety margin that's built into risk assets is much less now, and therefore you've got to be much more careful in how you apply the trades," he tells CNBC.

To be sure, the Fed is wary of upsetting financial markets, as it sees financial market strength as a key to boosting the economy, El-Erian says. Major stock indexes rose to record highs earlier this week.

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"The Fed can't get to its economic objectives without going through the asset markets," he explains. "So the Fed feels obliged to continue to support the asset markets, not as an end in itself, but as a means to an end. And that [end] is the economy."

But that doesn't guarantee the Fed's effort will be successful, El-Erian notes.

As for the central bank's October minutes, released Wednesday, the economic discussion was ho-hum, with central bank officials citing modest growth now but faster growth ahead.

That's the same position the central bank has taken virtually every time since the 2008-09 financial crisis, El Erian argues.

"But the policy discussion is amazing," he adds. "There are so many open questions. When do you taper? How do you taper? Can you deal taper from forward guidance? How do you communicate? Should you lower interest on excess reserves? What do you do with cost and risk?"

All this indicates the complexity of the Fed's mission at this point. "That's important for the markets," El-Erian contends. "That's why the trade that has worked so well [buying risk assets], you've got to be more differentiated."

As for when the Fed will begin tapering its $85 billion of monthly bond purchases, "no one knows for sure when it's going to start," El-Erian states. "That's . . . very difficult to predict, especially when you have a committee that's all over the place."

But he thinks it will "absolutely" happen over the next 12 months.

"Are they going to do it in a gradual fashion? Absolutely," El-Erian insists. "Are they going to try — importantly for markets — to strengthen forward guidance? Yes."

That means it's now advantageous to buy bonds at the short end of the yield curve and sell at the long end, he maintains.

When it comes to the 10-year Treasury note, with tapering in the cards, its yield will probably trade in a range of 2.6 to 3.1 percent in the short term, El-Erian says.

Other experts agree with him that the Fed minutes confirm a tapering is coming. "It sounds like they're moving closer to tapering" Sam Coffin, an economist at UBS Securities, tells Bloomberg.

"There's a lot more focus on their forward guidance and a lot of that is because if they're moving closer to tapering they want to signal they'll stay easy after the tapering has begun."

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The Federal Reserve's determination to taper its quantitative easing (QE) puts more risk in risk assets, such as stocks, says Pimco CEO Mohamed El-Erian.
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2013-58-21
Thursday, 21 November 2013 11:58 AM
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