Famed economist Mohamed El-Erian says there's a troubling supply and demand problem brewing in the US bond market
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- Mohamed El-Erian sees a problem brewing in the US bond market.
- The renowned economist warned that this could lead to further problems for investors.
- He also sees the growing deficit as a problem that is likely to get worse.
Mohamed El-Erian has warned investors of problems in private credit, but he also sees trouble brewing in the market for US government debt.
El-Erian outlined his views on the Treasury market in an interview on CNBC, highlighting an emerging supply and demand issue that has him concerned.
"We have developed a fundamental imbalance between the amount of issuance we're going to see and the amount of money available to buy that issuance," he said.
El-Erian noted that it poses complications for the US economy as the government ramps up its efforts to sell more debt at a time when buyers might be scarce and as concerns are already swirling about the US debt and budget deficit.
He revealed a few specific factors he sees weighing on the US bond market as new bond supply ramps up, putting downward pressure on prices and upward pressure on yields.
"We're running a deficit of 6% or 7% of GDP," he said. "We have enormous refinancing to be done, and companies are issuing a lot more than they've had in the past."
El-Erian also addressed the recent statements made by former US Treasury Secretary Henry Paulson, who warned investors on Thursday to prepare for a "vicious" bond market crash that the government is going to have to deal with.
While El-Erian noted that he views Paulson's claims as "alarmist," he acknowledged that he sees other problems stemming from the demand side as interest from foreign buyers weakens.
In February, Chinese regulators urged banks to scale back on US debt holdings. Now El-Erian seems to think this problem is accelerating.
"Buyers get nervous," he said. "They want market solutions. They don't want any price imposed on them. That's a concern. But I think the fundamental issue is that the market doesn't realize we have this imbalance that's going to get bigger."