With the Federal Reserve’s easing program still providing support to bonds, they are unlikely to move in a single direction soon, says Pimco CEO Mohamed El-Erian.
“The bond market, like every other market, is artificially valued by the involvement of the Fed,” he tells CNBC. “In the short term, we think that we are range-bound on Treasurys. And the range is 1.85 to 2.25 percent on the 10-year yield.”
That yield stood at 2.04 percent Wednesday morning.
As for the long-term “a lot depends on if you believe in this handoff … from [Fed] assisted economic growth to sustained growth,” El-Erian says. “If you believe in this handoff, then you should migrate over time into risk assets. If you think this handoff is going to be a problem, then you should have a diversified asset allocation.”
He hasn’t seen anything of the mass exodus from bonds that many commentators have predicted. “What you do see is an encouraging inflow into equity funds.”
Stock mutual funds have attracted $36 billion over the past nine weeks, El-Erian says. But that’s coming from cash rather than bonds.
“We have seen no sign as of yet of the ‘great rotation’ that people are talking about,” he says.
When the Fed exits its easy monetary policy, it “will be one of the most challenging issues facing any central bank.”
“There is no doubt that by artificially altering prices the Fed has changed behavior, and some of the behavior that has changed is the normal lending that goes on to various sectors,” he notes. “The problem is that it has also changed massive behavior elsewhere and that is asset-allocation behavior. So it will be very delicate.”
Backing up El-Erian’s view of bonds trapped in narrow bands, the 10-year Treasury yield hit an 11-month high of 2.08 percent Friday, but now bonds are seeing buying interest having made that move.
“These are semi-attractive levels,” Justin Lederer, an interest-rate strategist at Cantor Fitzgerald, tells Bloomberg. “The U.S. is not ready to break significantly higher in yields. … There are just buyers out there.”