El-Erian warns US bond market signals structural shift
The former PIMCO chief economist argues that rising real yields, driven by tech borrowing and weak foreign demand, are set to make life in America significantly more expensive.
Economist Mohamed El-Erian has warned that the US 30-year Treasury yield reaching 5.27 per cent marks a structural economic shift rather than a temporary bout of volatility. In an opinion piece for The New York Times, El-Erian, who previously served as chief executive of PIMCO, described the current bond market sell-off as distinct from previous episodes, noting that the yield level has not been seen since 2007.
El-Erian argues that the surge is driven by rising real yields, which represent the inflation-adjusted compensation investors demand for bearing risk in a volatile world. He points to two primary catalysts: heavy borrowing by technology firms for AI data centres and reduced demand from traditional buyers such as Japan. According to Goldman Sachs data cited in the piece, Big Tech companies have sold almost $500 billion in bonds this year and are expected to borrow a minimum of another $300 billion by year’s end.
The fiscal implications are substantial. With the US national debt exceeding $40 trillion, the Congressional Budget Office projects that net interest payments for fiscal year 2026 will reach $963 billion. This figure consumes nearly 20 per cent of federal revenue, making interest payments the second-largest yearly government spending item after Social Security. El-Erian notes that this leaves less available for other priorities such as defence or health care.
International dynamics are also complicating the picture. As the Japanese yen dipped to lows not seen since the 1990s, fears grew that Japan might sell US bonds to support its currency. Reports indicate the US Treasury intervened in the foreign exchange market by buying yen with euros to assist Japan and prevent a more severe bond sell-off. Meanwhile, the US dollar has weakened, falling to roughly 98.84 from 101.53 a few months ago.
For households, the impact is expected to be felt across housing, transportation, and credit costs. Although Freddie Mac reported a slight decline in the 30-year mortgage rate to 6.65 per cent, El-Erian warns that low-income households and first-time home buyers are particularly vulnerable. He suggests that higher rates will sideline prospective buyers and inflate the everyday cost of living, effectively making America more expensive.
El-Erian concludes that while investment in artificial intelligence may eventually deliver higher productivity, the transition needs to be managed carefully. He cautions that relying solely on rate hikes to restrain corporate borrowing may be insufficient given the palpable enthusiasm for AI, leaving policymakers with few quick fixes for the emerging affordability crisis.
