Tags: El-Erian | Japan | volatility | bond

Pimco's El-Erian: Recent Market Behavior 'Signals More Volatile Times Ahead'

By    |   Monday, 03 June 2013 01:50 PM

Volatility is rising, liquidity is falling in some places and anxiety is increasing, according to Mohamed El-Erian, CEO and co-chief investment officer of fund giant Pimco.

El-Erian believes that these changes are not just a "blip," but rather are "indicative of a deeper change."

"The related underlying shifts could be secularly beneficial or could well signal more volatile times ahead," he notes.

Editor's Note:
Billionaires Dump Stocks. Prepare for the Unthinkable.

And the "dislocations seem to be cascading gradually from the least liquid [markets] to the more liquid ones," instead of impacting all the market segments at the same time.

For instance, he explains, Japan's central bank's purchases of large amounts of securities has helped sparked a rally in Japan's stock market.

"In the last few days, however, Japan is no longer emitting a consistently constructive signal," El-Erian writes in an article for Fortune. "The Nikkei has fallen 12 percent since May 22, with some notable daily drops of 7 percent, 5 percent and 3 percent. The behavior of Japanese government bonds has been quite volatile and increasingly inconsistent. And the yen is now less unidirectional."

Japan's government has good cause to be worried, he says. If it cannot get the country on the road to economic growth, the risk of financial turbulence will substantially increase.

"It has no choice but to venture even deeper into experimental territory as it attempts to influence market pricing and investor behavior," El-Erian states.

"For its part, the Bank of Japan is under pressure to be even more explicit and forceful."

In the United States, speculation that the Federal Reserve will begin shrinking its massive bond-purchasing program has prompted a jump in Treasury yields and impacted other government bonds throughout the world.

"Together, these two factors have contributed to higher market volatility and more patchy liquidity in certain market segments," he points out. "We are also seeing a reduction in risk tolerance among intermediaries and some large investors."

While the recent market behavior could be a blip, he suggests, "the hope is that [it] is indicative of two eagerly anticipated handoffs: from assisted-growth to genuine private sector-led growth; and from purchased financial stability to structurally sound stability."

If and when that shift occurs, it would mean markets could rely on economic fundamentals rather than central banks.

The problem, he says, is that the data do not show that happening, at least not yet. The United States has yet to reach "economic escape velocity," Europe is in a recession, China is slowing and other large emerging economies are struggling.

"I worry that, rather than signal positive handoffs, recent changes are indicative of a gradual erosion in the trust that investors have placed in the power and effectiveness of central banks," El-Erian writes. "It would be natural for this phenomenon to start in Japan as the country faces a difficult set of initial conditions and the lowest historical level of policy credibility."

The Bank of Japan has vowed to do what's necessary to reduce bond market volatility, Reuters reports.

The central bank intends to end Japan's deflation by doubling its holdings of Japanese government bonds in two years and pump 60 trillion to 70 trillion yen a year into the economy.

"I don't think the recent rise in yields is having a big impact on the economy," said Bank of Japan Governor Haruhiko Kuroda at a news conference, according to Reuters.

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

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Volatility is rising, liquidity is falling in some places and anxiety is increasing, according to Mohamed El-Erian, CEO and co-chief investment officer of fund giant Pimco.
El-Erian,Japan,volatility,bond
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2013-50-03
Monday, 03 June 2013 01:50 PM
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