The Bond King thinks the Federal Reserve’s emergency rate cute was a sign it panicked. And that, of course, is not good news because he thinks the coronavirus-troubled economy is shaky.
In a bearish assessment of credit markets and the economy, DoubleLine Capital founder and CEO Jeffrey Gundlach said he thought the Fed was headed toward zero percent interest rates. That’s a level the central bank last visited in response to the 2008 financial crisis.
When the Fed’s policymaking body has its official meeting next week, on March 17-18, it likely will lower the federal funds rate, its short-term benchmark, yet again, he said in remarks to CNBC. In an extraordinary action, the Fed slashed the rate by a half percentage point (50 basis points) last Tuesday, in an effort to contain COVID-19’s economic impact.
“If we look at history, once the Fed does a panic, inter-meeting rate cut, particularly when it’s 50 basis points … they typically cut pretty quickly again,” Gundlach said. “I’m in the camp that the Fed is going to cut rates again,” perhaps during its regularly scheduled meeting this month.
“We will see short rates headed toward zero,” Gundlach added. And “when I say panicked, it doesn’t mean it’s not justified. Sometimes panic is justified.”
For the longer term, things are looking dicey for the economy, he said, noting that numerous client meetings have been scrapped at his firm because of travel bans. “Business activity is likely to contract,” he said, as a result.
Right now, the job situation appears solid, with the US Labor Department’s jobs report for February logging a gain of 273,00, blasting past the 175,000 estimate. Trouble is, the virus scare didn’t really appear until the very end of last month—and March’s showing may be sobering in light of the virus-linked slowdowns.
In particular, Gundlach is looking at unemployment claims, which have been on the low side. Last week, they were 216,000, a drop of 3,000 from the week before. “If they go above their five-year moving average,” he said, giving 243,000 claims as the mark for that, “you’re done.”
“If this situation with travel and leisure and nonsocial activity continues, you just wonder if you can keep initial claims down near 200,000 per week,” Gundlach added.
The one good thing about last week’s wackiness in the bond market was that the yield curve—which had been inverted—un-inverted thanks to the Fed rate cut.
The three-year Treasury bill at the end of February was 1.45%, more than the benchmark 10-year note’s yield of 1.3%. Inverted curves, of course, are classic harbingers of an impending recession, yet another burden for the capital markets to shoulder. As of week’s end, though, the 10-year yield had fallen further (to 0.7%), while the three-year T-bill had dropped even lower (to 0.48%).
Meanwhile corporate bond markets took it heavy. American Airlines’ bonds sank to near-distressed levels, amid cancellations of conferences, sporting events, and business travel. Bonds for rental car companies and cruise lines also got slammed. as companies axed business travel and conferences and sporting events were called off. Rental car company and cruise line debt came under increasing pressure, as did energy company bonds and loans.