Economist Mohamed A. El-Erian has warned that a growing mismatch between debt supply and investor demand is building risks in U.S. bond markets and investors may not be pricing that in, as fiscal pressures intensify.
“We do have a developing fundamental imbalance between the amount of issuance we’re gonna see and the amount of money available to buy that issuance,” El-Erian said in a CNBC interview on Thursday.
Rising Issuance Meets Weakening Demand
The Wharton professor pointed to persistent deficits of around 6–7% of GDP, heavy refinancing needs and increased corporate borrowing as key drivers of supply, while demand is showing signs of strain.
“On the demand side, the money from the Middle East isn’t going to be there in the quantity that has been,” he said.
The U.S.-Israeli war on Iran, which began on February 28, has killed thousands of people and effectively closed the critical Strait of Hormuz, through which a fifth of the world’s oil and liquefied natural gas transits, threatening the worst oil shock in history and roiling markets.
‘Doom loop’ Risk Emerges In Bond Markets
He warned the imbalance could trigger a so-called “doom loop,” where rising issuance pushes yields higher, further worsening government financing conditions.
The remarks come as former Treasury Secretary Henry Paulson also flagged risks in the Treasury market, urging contingency planning for a potential demand shock that could be “vicious.”
“I think the fundamental issue is that the market doesn’t realise we have the same imbalance that’s gonna get bigger,” El-Erian said.
Policy Action Seen As Difficult
El-Erian, who serves as part-time chief economic adviser at Allianz, said addressing the issue would require difficult fiscal measures. “It’s gonna take increased revenues, taxes, and dealing with expenses,” he said, adding that reforms to Social Security and healthcare would likely be needed.
He also said closing tax loopholes could raise revenues without significantly hurting growth, but flagged political hurdles. “The challenge… is marshalling Congress to do something.”
Despite repeated alerts from prominent investors, policymakers have delayed action, he said. “At some time, the can’s gonna get squashed, and you can’t kick it anymore.”
El-Erian added that while some hope artificial intelligence (AI) could boost productivity and ease fiscal pressures, relying on that outcome remains uncertain.
In another post on Friday, El-Erian said President Donald Trump‘s reassurance that “everything will be fine” has acted as a form of “verbal intervention,” helping drive a sharp stock market rally, including a record Nasdaq winning streak.
U.S. stock futures moved higher on Friday, after Trump said the Iran war “should be ending pretty soon.”
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