Top Economist El-Erian Thinks Bonds Warrant A 'More Differentiated' View As Credit Risk Is Far From Done

As the Federal Reserve hiked its policy rate by over four percentage points in 2022 to tackle rising inflation, the U.S. Treasury market registered a record annual loss.

The U.S. bond market index declined 12.5% during the year, the most in its history, reported Bloomberg. The worst months for the index were in September (-3.45%), March (-3.11%) and April (-3.10%).

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El-Erian's Take: Allianz chief economic adviser and noted economist Mohamed El-Erian believes there is more enthusiasm pertaining to bonds after their downbeat performance in 2022.

“While analysts are unusually cautious about the prospects for stocks, there’s more enthusiasm for bonds after their horrid 2022 performance due to the view that central banks are mostly done hiking. A more differentiated view of bonds is warranted as credit risk is far from done,” El-Erian tweeted.

Benzinga’s Take: After a horrible rout, markets often seem to have a tendency to deviate towards the mean reversion theory where they expect the asset class to post a better performance and pare some losses. However, as El-Erian noted, a differentiated view of the bond market is vital in current times given that the possibility of both recession and credit risk exist.

Price Action: Yields hit their highest in the October-November period following which they started declining as inflation began showing moderation and Federal Reserve officials slowed the pace of policy tightening. The Vanguard Total Bond Market Index Fund ETF BND and the iShares Core US Aggregate Bond ETF AGG lost over 14% in the last year.

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Photo by IMF on Flickr