Anticipation of a flood of new bond supply is sending interest rates higher even as expectations for economic growth start to flat line, said Gundlach, as can be seen from flagging consumer confidence.
“What you have to watch out for is when it goes from an elevated feel-good position to a free fall. That means there’s a recession,” Gundlach said, regarding consumer confidence.
In fact, unemployment claims are usually a leading indicator of consumer confidence, said Gundlach. While unemployment has yet to spike, the number of job openings reported by U.S. employers has “already deteriorated.”
And in the U.S., at least, gold has not been a great safe haven, said Gundlach, because of the rising U.S. dollar. Eventually, as investors flee towards quality, gold should reach a new high.
The equity market, on the other hand, may be a land of opportunity for investors, said Gundlach, who said that stocks will eventually rebound. While he isn’t personally buying stocks, he has reduced his sort position in recent days.
Gundlach named his presentation “The Price Is Right?” because of unpredictable price movements in fixed income markets. For example, the spreads between BB and BBB rated corporate bonds have contracted, then expanded – leading to large discrepancies between bids and quotes.
There are also increasing discrepancies between the prices of bond ETFs and the value of their underlying indexes, said Gundlach, which is being caused by liquidity issues. Investors are having an easier time with price discovery in liquid, exchange-traded bond funds than they are trading the underlying fixed income instruments – so bond ETF prices are running ahead of the indexes themselves.
But even more concerning are the impacts that a recession could have on the corporate bond market, as ratings agencies will begin to downgrade bonds and a wave of defaults will sweep across high yield bonds, especially those issues by companies tied to the energy sector.
“If oil stays below $30, which it looks like it has a good chance of doing given the economic situation, you’re going to have en masse defaults in parts of the high-yield bond market and you can see that the oil sector is certainly pricing that in,” Gundlach said.