As investors come to terms with the impending end of easy monetary policy, a new threat looms: The heavy supply of U.S. Treasurys could bump up bond yields and place greater pressure on stock prices.
Stock markets globally came under heavy selling earlier this month after signs of higher inflation gave rise to fears that the Federal Reserve could hike interest rates at a quicker pace.
Investors are getting used to that now, said PIMCO, but the stock market could be rattled again if there isn't enough demand for the large supply of Treasurys.
"I think the market's starting to come to terms with these higher rates," Mihir Worah, PIMCO's chief investment officer for asset allocation and real return, told CNBC Wednesday.
"It's not just the Fed and inflation coming higher that the market has to get used to, but also Treasury supply. Given the big deficits and tax cuts, there's going to be tremendous Treasury supply in the United States."
The U.S. Department of Treasury is expected to sell $258 billion worth of debt this week. Among the issuance so far is the auction of $28 billion in 2-year notes at a high yield of 2.255 percent — the highest since August 2008.
That, coupled with the release of stronger-than-expected inflation data, saw the 2-year Treasury yield hit its highest level in nearly 10 years.