Whenever the yield on 30-year Treasury bonds starts to reach or cross the 2.00% mark, it would appear that the Federal Reserve steps into the market and starts buying the so-called “long bond.” That’s what DoubleLine CEO Jeffrey Gundlach told clients on a webcast last week.
“It appears [yield curve control] is underway,” Gundlach remarked.
Will the Fed start to aggressively defend the long end [Treasurys with maturities of 10- to 30 years] of the bond market? “If so, it will be hard for the 10-year {Treasury] to make it back to 2%,” Gundlach said.
The economy finds itself in a strange place 18 months after the pandemic began. Gundlach noted that nominal GDP has come all the way back to pre-pandemic levels, but there are still 5.3 million fewer people working.
Moreover, almost the “entire source” of growth has come from $3.7 trillion of stimulus from Congress. There is still another $1.3 trillion or so of stimulus that has yet to be spent. As big a number as this is, Gundlach observed that nations like Germany and Japan have shelled out more on pandemic-related stimulus.
Viewed from another angle, he said the sheer amount of money spent during the public health crisis is roughly two-thirds more than was spent in the Great Financial Crisis (GFC). But of equal significance was the fact that the money was released into the system four times faster than during the GFC, Gundlach said, as the Fed’s balance sheet expanded by $3 trillion in 16 to 20 weeks.
It’s likely “the Fed will continue tapering,” he added, even though the betting is that the Fed funds rate will stay at zero for at least one year.
All sorts of distortions in the economy are surfacing. Foreclosures are “at a multidecade low,” but delinquencies are high, Gundlach said. “The government has the tiger by the tail,” but it can’t get off or it will get “mauled."
Housing affordability is low as a percentage of income even though home prices are up. That’s primarily attributable to “negative real mortgage” rates, he said, adding,. “I predict rents will go up sharply” when eviction moratoriums end, he said
In the labor market, wages are not accelerating among the heart of the work force, people aged 24 to 55, he noted. Only among 16- to 24-year-olds are earnings climbing as employers “struggle to get entry-level” workers, he said.
With regard to the stock market, DoubleLine has favored European stocks over U.S. shares largely because of the valuation gap. Over the last year, their performance has been almost the same, Gundlach said. But that’s a “huge trend change,” he added. “Once the dollar starts to fall, we think European stocks will break out.”