The U.S. Treasury market "has lost its anchors," Mohamed El-Erian, Allianz chief economic advisor, said Thursday, explaining, "It's lost its policy anchor, it's lost its technical anchor and it's lost its economic anchor."
In terms of policy, if the Federal Reserve maintains its "excessive" dependence on backward-looking data, that means the central bank doesn't provide an adequate forward look to where it's going, El-Erian said on CNBC's "Squawk Box."
El-Erian spoke hours before Fed Chairman Jerome Powell gave a speech indicating the Fed may not be done raising its benchmark interest rate following an aggressive hiking cycle. El-Erian noted various debates surrounding the lagged effects of the rate hikes already in place and other policy questions surrounding the Fed.
Technically, the market has lost or is losing reliable buyers, including the Fed and China, he said, adding that "institutional investors are underwater" and "we may also lose Japan."
In the short term, "the inherent stabilizers are weakening," El-Erian said. The people who usually come in when yields are up to lock in interest rates "have been catching a falling knife, so they're less keen to come in right now," he explained, using a term that generally refers to buying assets with falling prices.
"It's the way in which Treasury yields have moved that raises both economic and financial concerns," El-Erian said.
It's very hard to guess where stability in yields comes in, he said. Supply will go up in a serious manner due to what's happening with the government deficit, he explained. "We don't know where the buyers are going to be and at what level, so we will probably overshoot — in order to find the buyers.
"The trouble with overshooting is that it causes distressed sales, and that's why the more we move violently like this, the more you risk an even larger overshoot. Now that's a technical dynamic that we typically see in emerging markets in a high yield," he said.
