“The recent bond market tumble will likely carry over into stocks, says Pimco CEO Mohamed El-Erian.
The 10-year Treasury yield jumped to a 13-month high of 2.23 percent last week and stood at 2.15 percent Tuesday night.
“May was important because every source of carry was under attack — interest rate risk, credit risk … whatever you name — came under attack,” El-Erian told CNBC.
“My sense is that some of it will continue, … and there will be some cascading down into equities.”
The fundamental problem is that the Federal Reserve’s quantitative easing (QE) program “is taking virtually every financial asset to artificially elevated prices,” El-Erian said. “There’s a huge disconnect between prices and fundamentals.”
“The hope that’s priced into the market is that we’re going to replace artificial growth with real growth,” he noted, but so far that hasn’t happened.
“QE is a medication that comes with a warning, which says: ‘Do not use it for a long time because you’ll get side effects,” he quipped.
So how should investors deal with this difficult dynamic?
“Do what Pimco has been doing now for a few weeks, which is to pull back from risk, pull back from surfing this wave of central bank liquidity … and step back from risk a little bit,” El-Erian suggested….”
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