Economist Mohamed El-Erian says investors need to think differently about the global bond market.
He told CNBC on Friday that the asset class should be treated in an “opportunistic” manner rather than as a core part of a portfolio.
A 30-year bull run for fixed income has continued this year as investors have rushed to so-called “safe havens” amid the U.S.-China trade war and concerns over an economic downturn.
“Estimates earlier this summer showed that approximately $15 trillion of government bonds now traded with a negative yield. Yields have an inverse relationship to a bond’s price and a negative yield would mean an investor is essentially paying for the privilege of holding a country’s sovereign debt. That $15 trillion figure has nearly tripled since October 2018 with an expectation that central banks will continue to support the market with low rates and possible asset purchases,” CNBC.com explained.
“You have to think differently about the bond market. We used to think in terms of the bond market as a core allocation. And we went a step further and said: ‘You can outperform in bonds as opposed to equities because of all these structural issues’. That’s the wrong way to think about the bond market today,” said El-Erian, an economist for Allianz who used to run investment giant Pimco.
“The bond market today is opportunistic, it is very different from the core allocation to opportunistic. So look for opportunistic positioning. So for today, Argentina today. Is the country in a mess? Yes. But the bonds have overshot,” said El-Erian, a Bloomberg Opinion columnist and Newsmax Finance Insider.
Meanwhile, Bloomberg said that Friday’s weaker-than-forecast U.S. payrolls report was gloomy enough to stem the biggest Treasuries rout in years.
Benchmark 10-year notes pared an earlier drop, with yields falling to 1.55% from 1.60% after the labor data. Two-year yields were virtually flat.
The relative calm was a departure from Thursday, when yields surged across the board on U.S-China trade optimism and strong U.S. services data. The jump in 10-year yields -- 9 basis points -- was the biggest since April, while two-year yields at one point were on course for their biggest jump in a decade.
Friday’s decline in yields following the job data is a “knee-jerk reaction given the fast and furious sell-off we’ve seen in the last couple days,” said Alex Li, head of U.S. rates strategy at Credit Agricole SA in New York. “The hurdle wasn’t high to end the selling.”
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