Tags: El-Erian | bond | stocks | risk

Pimco's El-Erian: Bond Drop Likely to 'Cascade Down' into Stocks

By    |   Wednesday, 05 June 2013 11:58 AM

The recent bond market tumble will likely carry over into stocks, says Pimco CEO Mohamed El-Erian.

The 10-year Treasury yield jumped to a 13-month high of 2.23 percent last week and stood at 2.15 percent Tuesday night.

"May was important because every source of carry was under attack — interest rate risk, credit risk ... whatever you name — came under attack," El-Erian told CNBC.

Editor's Note:
The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

"My sense is that some of it will continue, ... and there will be some cascading down into equities."

The fundamental problem is that the Federal Reserve's quantitative easing (QE) program "is taking virtually every financial asset to artificially elevated prices," El-Erian said. "There's a huge disconnect between prices and fundamentals."

"The hope that's priced into the market is that we're going to replace artificial growth with real growth," he noted, but so far that hasn't happened.

"QE is a medication that comes with a warning, which says: 'Do not use it for a long time because you'll get side effects," he quipped.

So how should investors deal with this difficult dynamic?

"Do what Pimco has been doing now for a few weeks, which is to pull back from risk, pull back from surfing this wave of central bank liquidity ... and step back from risk a little bit," El-Erian suggested.

"Reduce your equity risk, your liquidity risk, your credit risk." Interest rate risk is ok now, because Treasurys are range-bound.

"Walk away from risk, don't sprint away," he added.

Jeff Gundlach, CEO of DoubleLine Capital, has a more bullish take on Treasurys. "It’s a horrible time to be exiting bonds,” he said during a webcast presentation Tuesday, Bloomberg reported.

Bond yields probably won’t rise much more soon, Gundlach maintained. And the 10-year Treasury yield may fall to 1.7 percent by year-end, because of weak global economic growth.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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The recent bond market tumble will likely carry over into stocks, says Pimco CEO Mohamed El-Erian.
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Wednesday, 05 June 2013 11:58 AM
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