"Don’t remember such a dramatic repricing of rate cuts": Mohamed El Erian on US bond yields

Leading economist Mohamed El Erian also explained why US' lower GDP growth won't translate into rate cuts.

Leading economist Mohamed El-Erian has commented on the unprecedented speed with which the US bond markets repriced the rate cuts.

Though the US GDP growth number for the first quarter of the fiscal came out lower than expected, inflation reflected in the personal consumption expenditure (PCE) index continues to be worryingly high. Therefore, the markets' expectations of rate cuts has been turned upside down.

Also read: Rising US yields spark concerns for global equities amid economic uncertainty. What this means for Indian markets

The market's expectations have changed from seven rate cuts this year to one by the end of the year. If rates are expected to stay high, then long-term bonds lose their earlier appeal, their prices fall and cause their yields to rise. Bond prices and yields are inversely related.

El-Erian, the President of Queen's College,  University of Cambridge; and Chief Economic Advisor at Allianz, posted on X about the "dramatic" speed with which the markets responded to the change in expectations.

He wrote, "the whole US yield curve shifted up in reaction to the data (the US GDP data)... including the 2-year which traded above 5 percent as markets pushed to December the expectation of the first rate cut by the #FederalReserve".

He added, "Amazing to think that, just four months ago, #markets were looking for seven cuts starting last month. I don’t remember such a dramatic repricing of rate cuts in such a short period of time."

In an earlier post, he explained why a slower GDP growth number won't translate to rate cuts.

Also read: Gold trims gains as US Treasury yields rise after economic data

"The hope that some have that this US GDP data (below) would take some pressure off US government bond yields (and others) will be totally dashed unfortunately by another hot inflation print: Core PCE inflation came in at 3.7% for the first quarter, well above both the prior three months and the consensus forecast," he wrote.

"This combination — weaker growth and higher inflation — is problematic for the economy and markets, with political and social spillovers," he added.