August 9, 2012

PIMCO’s El-Erian: ‘Be Wary of Steepening Yield Curve’

‘The long end is exposed to a lot more risk,’ bond manager says

Mohamed El-Erian, CEO of PIMCO. (Photo: Jurgen Reisch) Mohamed El-Erian, CEO of PIMCO. (Photo: Jurgen Reisch)

The steepening yield curve in the U.S. Treasury market should have investors worried, says PIMCO CEO Mohamed El-Erian.

While yields on government securities due in eight years and less are anchored by Federal Reserve monetary policy, bond buyers should be wary of longer-maturity debt, El-Erian, told “Bloomberg Surveillance” radio host Tom Keene on Thursday.

“What we would caution is rather than the level of the rates, the shape of the curve,” El-Erian said. “The long end is exposed to a lot more risk.”

As the news service notes, the difference in yields between two- and 10-year Treasuries widened to 1.44 percentage points, the most since May. Investors often demand a bigger yield premium on longer-maturity debt to guard against the risk that inflation will erode the value of fixed payments from the securities over time.

“U.S. debt extended losses today as a report showed fewer Americans filed applications for unemployment benefits last week, a sign the labor market may keep improving after employment picked up in July,” according to Bloomberg. “Corporate bonds have outperformed government debt as investors sought higher yields after Treasury rates dropped to records last month.”

Treasury yields reflect Fed policy, capital flowing out of the Europe amid the euro area’s crisis and “a sluggish economy,” El-Erian said.

“The bond market is trying right now to reflect many things. All of that tends to anchor the 10-year.” 

Reprints Discuss this story
This is where the comments go.