Expect a lot of volatility as we go forward, says Allianz's Mohamed El-Erian

Speakers

Mohamed El-Erian — Chief Economic Advisor at Allianz

Summary

Expects the US 10-Year Treasury yield to average closer to 4.50% than 4.00% for the remainder of the year, driven by fundamental valuation gaps.
Identifies a "market for lemons" dynamic in the software and AI sectors, where high-quality companies have been indiscriminately sold off alongside weaker peers, creating a stock-picker's opportunity.
Predicts a structural shift in market regime defined by "volatility and dispersion," driven by the transition from globalization/commercial logic to national security and geoeconomics.

Trade Ideas

Ticker	Direction	Speaker	Thesis	Time
AI SECTOR /SOFTWARE SECTOR	LONG	Mohamed El-Erian Chief Economic Adviser at Allianz / Warden Professor	"I would certainly be picking up names that were impacted by this theory of the market for lemons... massive opportunity for stock picks... particularly in the AI world and in the world impacted by AI." The recent sell-off in software and AI has been indiscriminate (correlations went to 1), dragging down high-quality companies ("peaches") alongside low-quality ones ("lemons"). This mispricing allows investors to buy companies with strong balance sheets and leadership at depressed valuations. Buy high-quality AI and software stocks that have been oversold. Focus on bottom-up selection (strong balance sheets) rather than buying the whole sector. Continued sector-wide rotation out of tech; failure of specific companies to differentiate themselves from the "lemons."	—
US TREASURIES	SHORT	Mohamed El-Erian Chief Economic Adviser at Allianz / Warden Professor	"From a valuation perspective, and from a fundamental perspective, it's very hard to justify a 4% ten year... I think you will see it going back towards four, four and a half... with the average being closer to 450." El-Erian argues that current yields are too low relative to economic fundamentals. He forecasts a mean reversion where yields rise toward 4.50%. Since bond prices move inversely to yields, a move from ~4.00% to 4.50% implies a decline in Treasury bond prices. Short duration or underweight Treasuries in anticipation of rising yields. The administration may implement some form of yield curve control if mortgage rates spike too high, capping yields artificially.	—
VIX	LONG	Mohamed El-Erian Chief Economic Adviser at Allianz / Warden Professor	"This is a market that... will continue to be defined by three words: volatility, dispersion... Economic outcomes... will be less a function of economic and commercial logic and more a function of national security, geopolitics." The stabilizing era of globalization and the "Washington Consensus" has ended. The new regime is driven by fragmentation and political priorities (geoeconomics), which inherently creates more friction and market shocks than the previous efficiency-driven era. Long volatility as a structural hedge against increased geopolitical and economic dispersion. Periods of artificial calm or central bank interventions suppressing volatility temporarily.	—