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The spike higher in Treasury yields is holding sway over stocks and foreign exchange, said economist Mohamed El-Erian who sees the moves rooted in investors' fearing the Federal Reserve will go too far in raising interest rates.
"Yields are in the driver's seat and in the backseat of stocks and now FX. So depending on what yields do, everything else follows and what we need desperately is a stabilization of yields. And we haven't had that - we've had a relentless rise," the chief economic adviser at Allianz said in a CNBC interview on Wednesday.
This week, the 10-year Treasury yield rose to 4% for the first time since 2010, and the 2-year Treasury yield climbed past 4.35% for the first time since 2007. The increases highlight this year's drop in bond prices as Treasuries experience their worst decline since 1949, according to Bank of America. Yields and prices move inversely.
Meanwhile, Wall Street's key stock indexes were on course to decline for September and deepen their year-to-date losses while the US dollar has soared against major currencies. The US Dollar Index has gained 18% during 2022 and the S&P 500 has slid into a bear market, down 22%.
Bond yields have been rising in other global markets as well, with sovereign risks at play in the cases of the UK and Italy, El-Erian said.
"In the case of the US, it's a Fed story," the President of Queens' College, Cambridge said. The Fed first mistakenly embraced inflation as transitory and fell behind the curve, he said.
"What the market is worried about [now] is the Fed will continue hiking and will go too far because it's looking at lagging variables. Why? Because it's trying to restore his credibility. And that is what's pushing yields up, especially at the front end in the US."
The government's $43 billion auction of 2-year bonds was "poor" this week, he said. "I will keep an eye on that because that has significant technical spillovers."
There's technical damage taking shape in the markets, and El-Erian said he's been hearing complaints about liquidity.
"The pleasant surprise is that we haven't seen anybody really get offsides, not as yet at least. And that surprises me. It seems that risk management has become much better," he said.
