What Will Rally Bonds After QE2? Nothing Short Of A Double Dip, According To Jeff Gundlach

Tyler Durden's picture

And continuing with the rates discussion from the prior post, next up we have that "other" bond manager, DoubleLine's Jeff Gundlach, chiming in on what would cause a treasury rally following QE2. His assessment: nothing short of a confirmed double dip, or "zero GDP growth." Dow Jones reports: "Over the past two months, government bond market participants have fiercely debated whether the end of the Fed's $600 billion in Treasury bond purchases in June will trigger a market sell-off or rally...the U.S. government bonds' rally in recent weeks shows investors have already bet the Fed's exit from the market will boost safe-harbor Treasurys because the economy will slow. So any gains will be limited.  "The 10-year Treasury yield has hit the moment of truth," Gundlach said in an interview with Dow Jones." Needless to say, 0% growth, which is already in the cards according to a simple correlation analysis between Y/Y GDP growth and initial jobless claims, will force the Fed, in the absence of another fiscal stimulus (which everyone knows is not coming from DC this year and possibly next year either), to step up double time and to launch far more easing to offset the economic weakness which we have been predicting for 6 months, and which the recent Japanese earthquake, and Chinese slowdown, merely accentuated. The only wildcard continues to be Japan, which many have expected would take up the monetary slack and issue tens of trillions in yen in QE, yet which has so far been slow to come, leaving the ball in either the US or European court. However, with the ECB in transition as JCT wishes to cement his hawkish legacy, the only real alternative continues to be the Fed. Oddly enough, stocks today appear to have started to already price in the start of QE3. When this sentiments shifts to precious metals and crude, our advice would be to hide you kids, and hide your wife...

From DJ:

The economy could be hurt without more monetary stimulus at a time when the U.S. government is tightening fiscal policy to shrink the budget deficits.

If the economy stalls sharply, the Fed may need to do a third round of quantitative easing, though the central bank will be reluctant to do so.

If the U.S. economy succumbed to a dire scenario--which Gundlach considers unlikely--the benchmark note's yield could fall to 1%, he added.

Although Gundlach does not expect the U.S. will lose its prized triple-A rating, he did warn about the long-term risk the federal government's debt burden could stoke inflation. Even though he dismissed the near term possibility of a dollar collapse, over the long term those who worry about an upsurge of inflation and take a bearish view on the U.S. currency may have a stronger case, he said.

Bottom line, and contrary to what some presume, not even JG is willing to put any more capital in play in duration absent much more clarity from the Fed (we already know Gross' position).

So take it away Jon Hilsenrath: it is time for some "advance color" on just when QE3 is coming.