Talking Numbers

Does El-Erian's resignation mean trouble for bonds?

Talking Numbers

The resignation of Mohamed El-Erian as CEO of Pimco may signal the start of a long-term bear market for bonds.

It's the resignation shaking the bond world: Pimco's Mohamed El-Erian is stepping down as CEO in March. El-Erian has been at Pimco on and off for 17 years and is said to have been at loggerheads recently with Pimco's founder, Bill Gross.

Other reports say El-Erian wanted to get out of his grueling work schedule to write a book and spend more time with his family. Being at home with the wife and kids is likely a better place than being long fixed income securities these days, especially if you're one of the biggest owners of bonds.

(Watch: Hours and friction prompted El-Erian exit)

Pimco, a division of insurance giant Allianz, manages $2 trillion. Its flagship Total Return Fund is the world's largest bond fund with $237 billion under management.

The last seven months were particularly rough for Pimco. From June to December 2013, a total of $61.5 billion left all of Pimco's funds according to Morningstar. For Pimco's Total Return fund, the bleeding started a little earlier; $43.9 billion exited that fund starting in May 2013.

Those outflows when the Federal Reserve Bank hinted that it would start tapering its then-$85 billion monthly bond-buying operation known as "quantitative easing" ("QE"). That started a massive bond sell-off in May, leading to the benchmark US Treasury 10-year yield to jump from its near-record lows around 1.6% to 3% in September. The 10-year traded around 2.8% on Thursday.

With the possible end of QE in the next several months, most market participants don't expect bonds to move back up (and rates to go back down) significantly any time soon. So, is El-Erian's decision to leaves less about wanting to write a book and more about wanting to close his bond book at the start of a long-term bear market?

CNBC contributor Gina Sanchez, founder of Chantico Global, says the markets are taking the excuse that El-Erian wanted to be with his family with a grain of salt.

"It is going to be an interesting time for the bond market," says Sanchez. "If you look over the next, say, five-year period, I think it's going to be really challenging for Pimco to maintain the levels of assets that they have."

(Read: Pimco boss departure weighs on Allianz shares)

Nonetheless, Sanchez doesn’t believe rates will move significantly higher in the short-term, though she sees Pimco's business having some difficulties ahead.

"We're going to continue to see accommodation," says Sanchez. "But, interest rates will eventually go up at least post-2015. I think the story at Pimco is going to be one of trying to hang on to assets and El-Erian's departure is probably giving us a hint of that."

"There's a lot more going on there than what they're telling us," says CNBC contributor Andrew Busch, editor and publisher of The Busch Update, on El-Erian's resignation.

Looking at a chart of the 10-year US Treasury bond prices, Busch sees a head and shoulders pattern in that formed in the past three years. Busch notes that the distance from the head of the pattern to its neckline is about seven points. Subsequently, the distance from the neckline to its most recent support level is also seven points. That support level is around $122.

"My view on Treasury yields is this: 2014 is going to [have] a lot of uncertainty," says Busch. "I expect higher interest rates. I think we'll get a chance to see 4% but right now, I would wait until we break that price of $122 and close below there to start selling again. That equates to 3.10% on the yield."

To see more of what El-Erian's resignation may signal to the bond market, watch Sanchez on the fundamentals and Busch on the technicals in the video above.

 

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