As the surge in Treasury yields lifts mortgage rates, threatening to dampen home demand and decelerate the refinancing activity, the recent upward climb in bond yields — driven largely (in our opinion) by a rise in inflation expectations — has generated an intense and confusing debate on its possible consequences.
Pimco’s chief executive Mohamed El-Erian thinks the rapid rise in bond yields will force the Fed to “engage again” in the purchases of U.S. Treasuries and MBS.
From Reuters: “What mistake can the U.S. economy afford to make? If you look at it that way, I suspect that we will see the Fed engage again in these markets,” El-Erian told Reuters Financial Television.
Debate is brewing within the Federal Reserve over whether it should ramp up its purchases of Treasuries and mortgage-backed securities to keep a lid on interest rates, or scale them back to avoid an outbreak of inflation.
El-Erian argues that the Fed will have to keep a lid on bond yields as the U.S. still faces major headwinds…
El-Erian’s suggestion seems to imply the Federal Reserve is only around halfway through its quantitative easing program.