Gundlach Says Fed ‘Panicked’ by Cutting Rates

Jeffrey Gundlach (photo courtesy of DoubleLine Capital)

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.

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“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.

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Tags: federal funds rate, Federal Reserve, Interest Rates, Jeffrey Gundlach, jobs report, unemployment claims

The coronavirus that has been stoking increasing volatility across global markets has begun to give rise to travel concerns among large domestic institutional investors.

The Alaska Permanent Fund Corporation and the Pennsylvania Public School Employees’ Retirement System (PSERS) have both disallowed their employees from engaging in business-related international travel due to concerns of their staff becoming exposed to the virus, according to a report from The Wall Street Journal.

The ban will last for the remainder of March for Alaska Permanent’s employees, and until April 17 for Pennsylvania’s employees. While the rule remains in effect, employees are asked to engage in meetings through teleconference and video calls.

“The COVID-19 coronavirus situation remains very fluid and is rapidly evolving,” PSERS Chief Investment Officer Jim Grossman wrote in a memo, which was reviewed by The Wall Street Journal. “For the safety of the investment professionals, their families, and others at PSERS, we feel it is prudent at this time to ban international business travel.”

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The Wall Street Journal reported that in the memo, Grossman asked staff to confirm any meetings they’re holding must first undergo a cursory check to determine if the individuals they’re to meet with have traveled to any regions that have witnessed a relatively high number of coronavirus diagnoses.

According to Johns Hopkins University, the countries outside of China with the highest counts of people infected with the virus are South Korea, Italy, and Iran, with several thousand cases each as of the time of publication.

A recent survey conducted by the Investment Management Due Diligence Association found that 29% of respondents, representing investment due diligence officers, have temporarily ceased conducting on-site due diligence meetings with investment managers.

One method they advised to circumvent any productivity losses due to health concerns was to conduct due diligence meetings through videoconference calls, citing that reading body language is a very important aspect of conducting due diligence and is accessible through videoconference.