The probability of a U.S. recession is rising, but it is not yet the base case for markets, former Pimco chief executive Mohamed El-Erian told Investment Officer. While the economy is slowing, it has not yet reached “stall speed,” and unless a full-blown downturn materializes, bond yields are unlikely to fall significantly.
Speaking after his keynote at the Digital Asset Summit 2025 in New York, El-Erian said that he expects the 10-year Treasury yield to settle between 4.25 percent and 4.75 percent this year.
“Yields probably won’t move significantly lower from current levels,” he said. However, he added that if the economy does fall into recession, “all bets are off.” Yields could drop below 4 percent as investors seek safe-haven assets.
According to El-Erian, most economists and policymakers expect the immediate future to be challenging for investors. However, significant debate persists about longer-term outcomes.
“The tricky issue,” El-Erian said, “is that the market is looking to economists for clarity, but economists themselves disagree violently with each other.”
The US 10-year treasury yield has come down from its peak in january
Thatcher or Carter?
El-Erian, adviser to Allianz and Gramercy and President of Queens’ College, Cambridge, assigned roughly 60 percent odds to what he described as a “Thatcher-style structural reform moment”, with about 40 percent odds of stagnation and declining growth potential, reminiscent of the stagflationary period under former U.S. President Jimmy Carter.
A “Thatcher-style structural reform moment” refers to policymakers’ willingness to endure short-term economic, social, and political pain to achieve long-term benefits, similar to the U.K. under Margaret Thatcher. Such a scenario would involve a streamlined government, an unleashed private sector, controlled debt dynamics, and a fairer international trade system.
In contrast, the “Jimmy Carter-type stagflationary scenario” would involve persistent stagnation, high inflation, and deeper economic difficulties, echoing the challenges of the late 1970s in the U.S. That scenario, El-Erian suggested earlier to his audience of 2,500 institutional participants, is directly linked to the current administration’s aggressive policies aimed at “detoxing” the economy.
Detoxing the economy
“They want to detox from a government sector that’s too large, too indebted, and risks crowding out the private sector by pushing interest rates higher. If not addressed, debt dynamics could spiral, with interest payments taking up an increasingly large part of the budget.” That plan, according to El-Erian, is broadly supported but “tricky” to implement effectively.
In the meantime, tariffs are adding to economic uncertainty. On Wednesday, the president urged the Federal Reserve once again to ease monetary policy and mitigate fallout from his economic strategy.
“The Fed would be MUCH better off CUTTING RATES as U.S. Tariffs start to transition (ease!) their way into the economy,” president Donald Trump remarked. “Do the right thing. April 2nd is Liberation Day in America!!!”
That date is when the U.S. is expected to clarify further reciprocal tariffs on certain countries and sector-specific tariffs on strategic industries.
Stall speed
Pressed on his personal views regarding recession risks, El-Erian clarified that while the economy is slowing, it has not yet reached a critical “stall speed”, which economists typically define as growth below 1 percent.
“We initially anticipated growth of 2.5 percent to 2.7 percent at the start of the year,” he explained. “Now, the IMF and others are revising projections downward, closer to 1.7 percent to 2 percent. We’re still not at stall speed, but we’re getting closer.”
“Yes, recession risk has risen. It’s not yet my base scenario, but it’s becoming a more substantial tail risk,” he said. “I’d say the odds are 30 percent.”
Despite El-Erian’s cautiously optimistic stance on structural reform, he remains acutely aware of persistent uncertainty, particularly regarding inflation. He warned that rising inflation expectations in recent survey data should not be dismissed lightly. Businesses, he noted, are increasingly anxious about whether they can pass higher input costs onto consumers, an issue reminiscent of the inflationary surge in 2021–2022.
“Companies are worried about higher costs and whether demand can hold up,” he said. “They don’t want to repeat the mistakes of the past, when they waited too long to respond to inflationary pressures.”
Europe’s “Sputnik Moment”
Amid such uncertainty, El-Erian advises investors to adopt a cautious strategy. Instead of going for a neutral 60/40 asset mix, investors should seek out “beta-agnostic investments” offering stable returns, paired with opportunistic, tactical positions to navigate the coming volatility. He did not specify which asset classes fall under this category.
When asked about Europe, El-Erian pointed to what he called a “Sputnik moment”. Much like the U.S. awakening to its vulnerabilities after the Soviet Union’s satellite launch in the 1950s, Germany and broader Europe are now confronting their own structural weaknesses in security and infrastructure.
“Germany is finally willing to spend on security, infrastructure, and Europe-wide programs,” he said. “However, the market has gotten somewhat carried away with this optimism. It will take considerable time for these measures to have a tangible economic impact, but the shift itself is a fundamental paradigm change.”