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Mohamed El-Erian on the bond markets: 'If you stick with the old rules, you will lose'

Key Points
  • A 30-year bull run for fixed income has continued this year with estimates earlier this summer showing that approximately $15 trillion of government bonds now traded with a negative yield.
  • That figure has nearly tripled since October 2018.
  • El-Erian, a well-known economist for Allianz who used to run investment giant Pimco, told CNBC that the market needed to be looked at in relative terms.
VIDEO3:4203:42
Bond market today is opportunistic, Mohamed El-Erian says

Economist Mohamed El-Erian told CNBC Friday that investors need to think differently about the global bond market, saying that the asset class should be treated in an "opportunistic" manner rather than as a core part of a portfolio.

A 30-year bull run for fixed income has continued this year as investors have rushed to so-called "safe havens" amid the U.S.-China trade war and concerns over an economic downturn.

Estimates earlier this summer showed that approximately $15 trillion of government bonds now traded with a negative yield. Yields have an inverse relationship to a bond's price and a negative yield would mean an investor is essentially paying for the privilege of holding a country's sovereign debt. That $15 trillion figure has nearly tripled since October 2018 with an expectation that central banks will continue to support the market with low rates and possible asset purchases.

El-Erian, a well-known economist for Allianz who used to run investment giant Pimco, told CNBC's Steve Sedgwick Friday that the market needed to be looked at in relative terms.

"You have to think differently about the bond market. We used to think in terms of the bond market as a core allocation. And we went a step further and said: 'You can outperform in bonds as opposed to equities because of all these structural issues'. That's the wrong way to think about the bond market today," he said at the Ambrosetti Forum in Italy.

"The bond market today is opportunistic, it is very different from the core allocation to opportunistic. So look for opportunistic positioning. So for today, Argentina today. Is the country in a mess? Yes. But the bonds have overshot."

Mohamed El-Erian
David Orrell | CNBC

Argentina's President Mauricio Macri saw a heavy loss in primary elections in August and the country's asset markets have seen heavy selling as populist-leaning opponent Alberto Fernandez has gained support. Argentine bond prices fell to record lows on Monday after the country imposed capital controls, and investors have fretted about a possible default for the South American nation.

'Non-commercial players'

El-Erian underlined that it was a "very different bond market" than what investors had become accustomed to, even likening it to the board game Risk. Talking specifically about central banks, he said that it was like playing Risk alongside "non-commercial players" who do not pursue the objective of the game and completely distort it.

"If you stick with the old rules, you will lose ... you have to think differently about the bond market," he told CNBC.

Contrasting fixed income with the stock market, he said that recent record highs in the U.S. needed to be validated by fundamentals and suggested that we could be approaching a point when both stocks and bonds are too expensive.

VIDEO2:0002:00
People have forgotten how to price in liquidity risks, Mohamed El-Erian says