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Jeffrey Gundlach, founder of DoubleLine Capital
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In a broad interview on CNBC, bond guru Jeffrey Gundlach of DoubleLine Capital said that investors should not bother to bet on the direction of the bond market, if only because there was no a lot of money to be made by accurately forecasting long-term treasury returns.
The founder of the Newport Beach-based bond fund manager says it might be safer for investors to stay cash instead, given the overwhelming uncertainty surrounding the COVID-19 epidemic and how it could hinder American economic growth.
Gundlach estimated the bond market was on the verge of reaching the lowest for the yield on the 10-year US Treasury benchmark, but added that the 2-year note
TMUBMUSD02Y,
yield is expected to decline more sharply as it is more sensitive to Federal Reserve policy. The comments come after the Fed cut its benchmark federal funds rate by 50 basis points on Tuesday, with some traders now expecting a further cut at their policy meeting scheduled for March 17-18.
“I am in the camp that the Fed will further cut rates, and maybe in two weeks,” he said.
Bond yields have dropped dramatically since the start of the year when there is concern that the spread of the coronavirus will curb economic activity around the world. The yield on 10-year treasury bills
TMUBMUSD10Y,
touched 0.90% on Thursday, a record low.
Gundlach said that investors should pay attention to the economic damage that could be caused by the coronavirus, and that management’s observation of weekly unemployment claims data in the United States as well as consumer confidence could be useful for see how households – the backbone of the economy – hold up.
“No one knows what is going on here, so caution is advised,” he said.
Gundlach also suggested that the Fed’s decision on Monday to make its first interest rate cut between political meetings since the 2008 financial crisis was less motivated by the recent correction in major US stock indexes like the S&P 500.
SPX,
and was more related to the pressure on the corporate debt markets that has surfaced in the past two weeks.
As lower-grade corporate bond prices fell, investors demanded compensation for holding such debt compared to risk-free Treasury bonds, which jumped to 5.04% on Friday, its highest level since January 2019, against around 3.60% in mid-February, according to the Bank. of America Merrill Lynch. Since the Fed’s interest rate cut, this premium has gone down.
“Jay Powell is very concerned that corporate credit comes from private equity,” he said.
Gundlach pointed out that the impetus for interest rate cuts could also have been the disappearance of supply of corporate debt in recent weeks. Debt issuance, even among investment grade companies, stopped briefly for several days, highlighting the difficulty of exploiting financial markets when risky assets are in free fall.
Lily: Trash bond issue stops “dead in its tracks” over fears of coronavirus
He underscored the historic parallel of December 2018, when the Fed moved from projecting several interest rate hikes to further stabilization, then to the start of its 2019 monetary easing campaign. In December 2018, the foreclosure the corporate bond market also forced companies to halt debt-raising plans, fearing that the Fed would tighten financial conditions excessively.
“
Jeffrey Gundlach, founder of DoubleLine Capital
“
In a broad interview on CNBC, bond guru Jeffrey Gundlach of DoubleLine Capital said that investors should not bother to bet on the direction of the bond market, if only because there was no a lot of money to be made by accurately forecasting long-term treasury returns.
The founder of the Newport Beach-based bond fund manager says it might be safer for investors to stay cash instead, given the overwhelming uncertainty surrounding the COVID-19 epidemic and how it could hinder American economic growth.
Gundlach estimated the bond market was on the verge of reaching the lowest for the yield on the 10-year US Treasury benchmark, but added that the 2-year note
TMUBMUSD02Y,
yield is expected to decline more sharply as it is more sensitive to Federal Reserve policy. The comments come after the Fed cut its benchmark federal funds rate by 50 basis points on Tuesday, with some traders now expecting a further cut at their policy meeting scheduled for March 17-18.
“I am in the camp that the Fed will further cut rates, and maybe in two weeks,” he said.
Bond yields have dropped dramatically since the start of the year when there is concern that the spread of the coronavirus will curb economic activity around the world. The yield on 10-year treasury bills
TMUBMUSD10Y,
touched 0.90% on Thursday, a record low.
Gundlach said that investors should pay attention to the economic damage that could be caused by the coronavirus, and that management’s observation of weekly unemployment claims data in the United States as well as consumer confidence could be useful for see how households – the backbone of the economy – hold up.
“No one knows what is going on here, so caution is advised,” he said.
Gundlach also suggested that the Fed’s decision on Monday to make its first interest rate cut between political meetings since the 2008 financial crisis was less motivated by the recent correction in major US stock indexes like the S&P 500.
SPX,
and was more related to the pressure on the corporate debt markets that has surfaced in the past two weeks.
As lower-grade corporate bond prices fell, investors demanded compensation for holding such debt compared to risk-free Treasury bonds, which jumped to 5.04% on Friday, its highest level since January 2019, against around 3.60% in mid-February, according to the Bank. of America Merrill Lynch. Since the Fed’s interest rate cut, this premium has gone down.
“Jay Powell is very concerned that corporate credit comes from private equity,” he said.
Gundlach pointed out that the impetus for interest rate cuts could also have been the disappearance of supply of corporate debt in recent weeks. Debt issuance, even among investment grade companies, stopped briefly for several days, highlighting the difficulty of exploiting financial markets when risky assets are in free fall.
Lily: Trash bond issue stops “dead in its tracks” over fears of coronavirus
He underscored the historic parallel of December 2018, when the Fed moved from projecting several interest rate hikes to further stabilization, then to the start of its 2019 monetary easing campaign. In December 2018, the foreclosure the corporate bond market also forced companies to halt debt-raising plans, fearing that the Fed would tighten financial conditions excessively.