The sell-off that hit global bond markets likely ins't finished, Mohamed El-Erian says.
The famed bond investor said big foreign buyers have reduced their appetite for Treasurys.
Yields rose again on Friday as investors took in a hot jobs report, which renewed fears of Fed rate hikes.
Mohamed El-Erian says investors should be ready for more bond-market turmoil.
Global bonds appeared to stabilize after enduring a widespread sell-off earlier this week, but there's a simple reason US yields have further to climb, the famed economist says.
Speaking to CNBC on Friday, El-Erian pointed to how prominent foreign buyers of US Treasurys, such as China and Japan, are less willing to buy US debt securities now, largely due to "domestic" or geopolitical issues.
There are myriad reasons some nations have cut their appetite for US debt instruments. Investors, for one, are growing increasingly concerned about the US's fiscal and inflation outlook, which can make bond buyers more hesitant to hold onto Treasurys due to the macro implications.
The Iran war has also weakened the currencies of some countries, which can make dollar-denominated assets like Treasurys more expensive.
Nations may also be redirecting their focus to supporting the values of their own currencies, which incentivizes investors to keep their wealth in local bonds instead of investing it overseas. For instance, Japan, the top foreign holder of US Treasurys, recently sold some of its US debt holdings to prop up the yen.
China, another big buyer in the Treasury market, has also significantly cut its holdings of US debt securities during the Iran war. The nation's holdings of US Treasurys fell to an 18-year low in June.
Norway's sovereign wealth fund has also proposed slashing its allocation to bonds this week, which would mainly impact its holdings of US Treasurys.
"The size isn't big, but the signal that traditional holders and buyers are becoming less reliable is a very important one," El-Erian said of Norway's potential pullback from the US Treasury market and the impact on yields.
"And that's why there's been pressure on interest rates. It has much more to do with a fundamental imbalance than it has to do with inflation or Fed credibility or the other reasons that have been cited," he later added.
Demand pressures are adding onto existing worries that have pushed yields higher in recent months, such as concerns about the sustainability of the US budget deficit and whether the Fed will successfully get a handle on inflation.
"I don't see any appetite in the US for immediate fiscal consolidation. So I suspect we will continue to see upward pressures on yields," El-Erian said.
The bond market has been on a rollercoaster lately as investors have grappled with concerns about inflation, the federal debt, and whether investors are feeling a greater impulse to shift away from the US.
The yield on the 30-year US Treasury recently topped its highest level since the Great Financial Crisis. The US debt balance also cleared the $40 trillion mark for the first time in August. The 10-year US Treasury yield has also hovered around its highest level in over a year.
The yield on the 2-year Treasury, which is most sensitive to expectations for Fed policy, cooled this week as investors took in Dovish comments from Fed Governor Chris Waller, but spiked again on Friday following a much stronger-than-expected August jobs report. Job gains crushed expectations, speaking to the strength of the US economy and its ability to weather higher interest rates, sending bond yields higher.