Investors should be wary of a steepening yield curve in the U.S. Treasury market, according to Pacific Investment Management Co.’s Mohamed El-Erian.
While yields on government securities due in eight years and less are anchored by Federal Reserve monetary policy, bond buyers should be wary of longer-maturity debt, El-Erian, the chief executive officer of the world’s largest manager of bond funds, said in a “Bloomberg Surveillance” radio interview with Tom Keene and Ken Prewitt.
“What we would caution is rather than the level of the rates, the shape of the curve,” El-Erian said. “The long end is exposed to a lot more risk.”
The difference in yields between two- and 10-year Treasuries widened to 1.44 percentage points, or 144 basis points, the most since May. Investors often demand a bigger yield premium on longer-maturity debt to guard against the risk that inflation will erode the value of fixed payments from the securities over time.
U.S. debt extended losses today as a report showed fewer Americans filed applications for unemployment benefits last week, a sign the labor market may keep improving after employment picked up in July. Corporate bonds have outperformed government debt as investors sought higher yields after Treasury rates dropped to records last month.
The yield on the 30-year bond rose three basis point to 2.78 percent at 10:40 a.m. in New York, according to Bloomberg Bond Trader prices. Yields on Treasuries maturing in 10 years climbed three basis points to 1.72 percent, the fifth straight daily increase, poised for the longest streak since March.
Treasury yields reflect Fed policy, capital flowing out of the Europe amid the euro area’s crisis and “a sluggish economy,” El-Erian said. Gross domestic product in the U.S. is forecast to expand 2.1 percent this year and in 2013, compared with 1.8 percent in 2011, according to the median estimate of economists surveyed by Bloomberg.
“The bond market is trying right now to reflect many things,” he said. “All of that tends to anchor the 10 year.”
The U.S. central bank has held interest rates near zero since 2008 to stimulate the world’s biggest economy. The Fed has also bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing, or QE.
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