Could the U.S. 10-year Treasury fall below 1%? According to Mohamed El-Erian, it’s possible.
“We no longer control our yield curve,” the chief economic advisor of Allianz said Wednesday on CNBC’s “Squawk Box.” “Our yield curve has been captured by Europe, has been captured by economic developments there, and has been captured by policy prospects there. So, we could [fall below 1%].”
The 10-year Treasury note yield slid to 1.37% in afternoon trading Tuesday.
Despite this, El-Erian still thinks the U.S. is in a 2 to 2.5% growth economy.
“The yield curve looks a little bit strange relative to macro-indicators,” he said. “It doesn’t look strange if you compare to what’s happening overseas. We have this massive disconnect between domestic economic conditions and a yield curve that prices lots of other things in the economy.”
According to El-Erian, this disconnect is “something that we don’t quite fully understand.”
“It’s most likely going to lead to a further disconnect between economics and finance,” he added.
In El-Erian’s view, the equity market seems “very decoupled” from other markets.
“The equity market seems to be somewhere else completely compared to fixed income, foreign exchange, financials, property,” he told CNBC. Adding, “It can continue to be decoupled if you believe central banks can maintain this wedge, if you believe central banks can continue to repress financial volatility.”
In El-Erian’s former colleague Bill Gross’ most recent commentary, Gross suggests there is a lack of fiscal policy that means “at best, a ceiling on risk asset prices, stocks, high-yield bond, private equity, real estate” or “at worst, minus signs at year’s end that force investors to abandon hope for future returns.”
El-Erian agrees, telling CNBC “we’ve over-relied on central banks.”
According to El-Erian, a a comprehensive policy response is needed that includes better fiscal policy.
“We are coming to the point where central banks are less effective,” El-Erian said. “In the case of the Bank of Japan, becoming ineffective [and] counterproductive.”
Looking overseas, El-Erian warned investors to be wary of European banks.
“The European banks are being hit with a triple whammy: a yield curve that takes away all earning potential, a recession that is likely to undermine credit quality, and, third, certain elements that amplify the concerns among investors,” he said. “So be really careful when you venture near European banks, notwithstanding the fall that they’ve had in price. Why? Because they’ve lagged.”
El-Erian said European banks have lagged the U.S. in rehabilitating the sector.
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