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Mohamed El-Erian: 'This is a distorted bond market'

Scott Gamm

The 10-year Treasury yield has been trading slightly above 2.6% in recent sessions — near its lowest level since early January when the stock market was still reeling from the steep December 2018 declines.

However, the U.S. 10-year Treasury yield shouldn’t be below 3%, according to Mohamed El-Erian, Allianz’s chief economic adviser.

“The reason why the U.S. 10-year is under 3% is because [the] 10-year German bond is under 20 basis points,” El-Erian said in an interview with Yahoo Finance Editor-in-Chief Andy Serwer in his weekly show “Influencers with Andy Serwer.” “Already if you were to plot the difference between U.S. yields and German yields, we are near historic highs. The only reason we are here is because of Europe.”

The 10-year German bund yields 0.07%.

Lower bond yields typically suggests investors are cautious about the economy. When investors buy bonds, considered a safer asset than stocks, its yield decreases.

Germany’s economy showed no growth in the fourth quarter of 2018, after posting negative growth in the prior economy.

“The only reason we’re here is because of what’s happening in Europe,” El-Erian said. “When you’re buying out the curve, you’re taking a European view, not a U.S. view. You’re much safer further in the curve where there was value and a lot less risk.”

When it comes to bond investing, El-Erian urges caution. “Understand, this bond market is not your everyday bond market — this is a distorted bond market,” he said. “It has a lot to do with what the European Central Bank is doing.”

The ECB has resorted to negative interest rates and quantitative easing to prop up its economy in recent years.

Meanwhile, when it comes to the stock market, El-Erian said investors should be more selective.

“Just like we’ve been up 20%, we could be down 20% in three to six months if the Federal Reserve stumbles again in its communication,” he said, referring to the stock market’s roller coaster ride, falling nearly 20% from September to December of last year and staging another nearly 20% rally in 2019 from the December lows.

The fourth quarter 2018 decline was largely caused by worries that the Fed was raising interest rates too quickly and keeping policy on autopilot.

“You have to be a little tactical in addition to long-term,” El-Erian said, referring to stock market investing.

Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm .

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