El-Erian Says Cash on Sidelines Is Minimizing Bond Market Losses

(Bloomberg) — Investors are using their massive cash piles to lock in attractive yields in global bond markets, helping to limit losses in the asset class, according to Mohamed El-Erian.

Most Read from Bloomberg

Demand for Treasuries is strong as demonstrated with this week’s auctions. And US money-market fund assets continue to surge, most recently rising to an all-time high in the week through Wednesday — offering fresh evidence that the desire for cash remains persistent even as the Federal Reserve prepares to cut interest rates.

The sale of $39 billion 10-year US Treasury notes Wednesday had “massive indirect demand,” El-Erian, the president of Queens’ College, Cambridge, told Bloomberg Television on Thursday.

“I can only reconcile it by the ton of cash that’s on the sideline, and the fear that if you don’t lock in interest rates now, you will lose interest income in the future. Every time we have a backup in rates, we have people rush back in.”

The Fed is expected to cut interest rates next week at its policy meeting for the first time in four years.

Total assets held in US money market funds are now at a record $6.32 trillion as of the week ending Sept. 11, according to the latest Investment Company Institute data. That’s up about $188 billion over the past six weeks.

And investors appetite for debt whether in the form of sovereigns or corporate bonds remain hearty. While demand for the $22 billion auction of 30-year US Treasury bonds Thursday wasn’t as strong as the 10-year sale, there was solid interest.

Outside of the US, Italy’s €8 billion sale of new 30-year debt attracted a record bid on Tuesday. And earlier this month in the UK, the sale of £8 billion in 2040 gilts — the first under the new Labour government — also matched record demand.

Recent price action in Treasuries is fueled in part by “money on the sideline being put to work quickly,” El-Erian, also a Bloomberg Opinion columnist, said.

On Thursday, Treasuries dropped across the curve, with little reaction to the 30-year auction. A day earlier, Treasuries had a choppy session in the immediate wake of the inflation report. That action quickly attracted dip-buying in the futures market. There was a rise in open interest across all tenors on the curve, signaling investors looking to reinitiate duration longs at lower price levels, causing the Treasury market to quickly recoup losses.

Story continues

–With assistance from Jonathan Ferro, Lisa Abramowicz, Annmarie Hordern and Edward Bolingbroke.

(Updates to include latest money-market fund asset data, adds chart.)

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.