PIMCO's El-Erian Says Steepening Yield Curve Is Troublesome; Fed's Policy Only Extends To 10-Year Bond

Friday, August 10, 2012 06:06
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PIMCO's El-Erian Says Steepening Yield Curve Is Troublesome; Fed's Policy Only Extends To 10-Year Bond

Tags: bonds | European crisis | Federal Reserve

Another voice from PIMCO is sounding a much different alarm than Bill Gross’s proclamation that the cult of equities is dead. This time, Mohamed El-Erian is warning of a steepening yield curve. He is primarily cautioning investors about taking on long-term debt.

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The Fed’s monetary policy has anchored debt with eight-year maturities but the CEO of the largest manager of bond funds says investors should be wary of maturities longer than that.
 
Spreads on two and 10-year maturities have widened to 144 basis points. This is the widest spread since May. Investors are accustomed to being paid more for longer maturities because they are taking more risk that inflation will erode the value of fixed payments over time.
 
El-Erian says the bond market is reflecting many economic worries, all of which tend to anchor around the 10-year bond. Yields on 10-year Treasuries climbed three basis points to 1.72 percent. This was the third day yields had increased on the 10-year.
 
Treasury yields reflect the market’s perception of Fed policy, the crisis in Europe, and the sluggish economy in the US. Corporate bonds have outperformed Treasuries as investors seeking income have sought higher yields. The Fed has kept interest rates near zero since 2008 to try and stimulate the flagging US economy.

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