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00:00But it's very interesting to see how different central banks are responding to the same thing. What's your take. My take John is it really depends whether you're on the receiving end or whether the source of disruption. So if you on the receiving end you of course don't like it and you hope that the source of this disruption is going to do something about it. If you're the source which is the Federal Reserve it's not clear what you do. Remember this has been mainly a move in real yields. You don't want it to become also a problem on the inflation front. So the Fed is in a very difficult position. And I think the best thing they should do is actually do nothing. That's what they have done so far Mohammed. They've done nothing. And we've seen real yields continue to rip higher. Let's just reflect on what we saw in the last 24 hours. Mohammed would you consider that orderly or disorderly. Would you consider that mostly fundamental or largely technical. So James very someone I really respect said we came very close to a market accident yesterday put it in the context of the four risks I've been talking to you about for months now. Remember the most likely risk was either a market accident and or disruptive yield curve dynamics. Yesterday we got disruptive yield curve dynamics following the seven year auction increasing the probability of a market accident. We self corrected which is the good news. But the bad news is the second market accident we got close to in two months defined the potential for a market accident. What does that look like Mohammed. Back in 2018 at the back end of 2018 we saw 100 basis points a high yield spread widening of the back of what many people considered at the time to be a Fed mistake. We haven't seen anything like that this time around. What do you think a market accident looks like. So let me give you an image in pursuing genuine economic objectives. The Fed provided the foundation for a whole building based on liquidity and in the last few months we've put more and more floors on that building. The bitcoins to GameStop Dispatch we just kept on building on the building and the foundation is low yields. So if people question the foundation of that building we will find out that the system has taken not too much interest rate risk not too much credit risk but too much liquidity risk. That is what we got close to it happen at the end of January. In the context of Robin Hood it happened yesterday in the bond market and after the seven year yield it is liquidity risk right now that. Muhammad you got to add to that liquidity risk in the Treasury market where there should be liquidity. We're not talking about esoteric parts of fixed income in private markets. We're talking about in the Treasury market. There is a liquidity risk. You've got a bill to that Mohammed. How severe is that risk. Is there wrong people woke up this morning and said the yoke of makes no sense. Look at the belly. Look at it. It makes no sense. It is there. It is serious. Okay. But it's not clear how you fix it. That's the problem. Now the good news is that our liability matching flows coming in that are self-correcting. That's why we're seeing better lower yields this morning. But I think the main message which is we've got to be careful about liquidity risk. Let's talk about another message to this market might be given the Fed. I think it's interesting that we've brought in rate hike expectations but inflation expectations have stayed the same over the last week Mohammed. That goes against the Fed is exactly what the Fed is telling us at the moment. Mohamed why do you think that is. What you think that's happening. So I wouldn't read too much in short term signals. I think that there was an issue about is that inflation risk or not. You've heard me say that there's a risk that the price level change will be a lot higher than what the Fed expects. But it's not going to be an inflationary process. The problem John is that if that happens the market is not going to make that distinction. Economists and central bankers will the market will not have. But I want to get to a final word for you. The Federal Reserve and the events next week. I went through this earlier. Next week on Monday Williams is speaking. We'll hear from both states. Mr. Kashkari as well. Governor Brown is speaking after that on Tuesday. We'll hear from daily to then Harker then Evans and then to close out the week before we get to pay Rose. We'll hear from such a Jay Powell. Mohammed are you expecting the scripts remain the same. So first I hope that they'll all have common speaking points. The last thing we want is confusing signals. That's the first thing that's important. Secondly I think the script will stay the same because there was no other script. Remember the problem with relying for too long on monetary policy is that the exit becomes difficult. But at the same time doing more becomes difficult. So they will stay with the same script only because there is no other script right now. And the final question for me then final word from you. I believe at this market right now. What's the one thing you take. I think you are essentially liquidity risk John. I cannot stress enough. It's not about credit and it's not about interest rate. It's somewhat liquidity. Mohamed always great to catch up with you sir. Good to see you.

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El-Erian: The Fed Should Do Nothing During This Bond Rout

Mohamed El-Erian, a Bloomberg Opinion columnist, says the Federal Reserve should do nothing during this bond rout. He speaks with Bloomberg's Jonathan Ferro on "Bloomberg The Open." El-Erian's opinions are his own. (Source: Bloomberg)

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