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.


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hawks5999's picture

Indeed. They are raping everybody.

slow_roast's picture

Fistful of dollars on the sidelines bitchez. 

SoNH80's picture

More NYC lox-chomper BS.  Muzak for the Death of the American Dream.

max2205's picture

Looks to me that they have been front running QE(X) for 2 months now...look at TLT

Slim's picture

Bond market is broadly derisking, not just a Treasury move.  Risk aversion is showing up in the fixed income markets.  You don't see it in equities yet other than some vol and a bit of rotation to less cyclical positions with constant snapback on general risk on...but then again that market has a record of never seeing anything until its too late so I wouldn't pay much attention.

Johnny Lawrence's picture

Bonds sold off for months after QEII began, and equities and commodities rallied.  When QE goes away, the opposite will happen. 

Plus, whenever the market has a rare down day, bonds rally. 

I don't think it's that difficult to understand.

dracos_ghost's picture

The Fed is pissing in the wind with the whole "job creation" thing. Globalization has put a permanent gradient in favor of offshoring. Add in the ridiculuous tax breaks the US gives corporations to kill jobs in America and move them offshore. No amount of QEx or BYOB is going to stop the bleeding.

This is a race to the bottom while maintaining the elitist status quo.

wombats's picture

Globalization just means our tax base has been exported...along with the jobs.  Of course our tax and regulatory policies make it attractive to send jobs offshore.  Too bad we can't tax the Chinese and Indians for the income taxes lost here.  Oh well, at least we got to buy cheap stuff at Walmart.

6 String's picture

What will rally the Russell 2000 after QE2? I just can't figure it out.


GOSPLAN HERO's picture

Buy Spanish bonds.

oogs66's picture

buy greek bonds and short spanish bonds

disabledvet's picture

buy sneak bonds and short the manic ones

What_Me_Worry's picture

Maybe we could just start a new program where the Fed lets the PDs vote how much QE they want, instead.  

Oh, right...

And WTF are gold and silver under selling pressure right now?

I am a Man I am Forty's picture

this could rinse and repeat for some time

disabledvet's picture

he forgot the "inflation adjustment."  of course "fixed income loves that!"  in the meantime "news flash!  higher prices=less consumption" which equals "less growth."  good luck simply "calling the higher prices more actual consumption" which has been going on--is it a decade now?  keep you're eye on the Fed.  they will make the "inflation determination" by raising rates. 

6 String's picture

I think the trick in this market is if it looks like the dumbest trade ever, than make it. It will surely work out. Nothing else works.

I mean why is the Russell 2000 up over nearly 3% in the last two sessions? The valuation for small caps is off the fucking charts, they are almost all USD based only, the sell at a historically ridiculous premimium to the S + P 500, after tax margins can't get much better and will likely revert.....and YET it's off to the races everyday.

Up 10+5 for the year and almost nothing disturbs the 2k. It's now officially the worlds safest and most stable asset known to mankind.

Boston's picture

Bottom line: a 2-3% sell off in US equities is not enough.  Such a minor dip won't provide enough political cover to do QE3.

Bruce K. argued about a month ago that we won't see QE3 this year.

Seems to me that we'll need to see much more damage in risk assets, and then, we'll start to see QE3 hints from Hilsenrath.

And because the 10-year has fallen to almsot 3.0% BEFORE major damage has happened, I'm now much more convinced that we'll see sub-3.0% before QE3 comes out.


buzzsaw99's picture

An extremely superficial and one dimensional analysis.

Tater Salad's picture

He's one of the brightest dudes I've seen an quite a while.  Love it even more that he's taken the opposite side of the Pimpco trade.

monopoly's picture

3% on the 10 year. And Bernank feels good about raping senior citizens who did nothing wrong except save, and trust in the govt. And this is ok in this country.

Makes me sick.

monopoly's picture

I think they are right on. Have been increasing my PM exposure lately.

SheepDog-One's picture

I never really gave a rip about bonds, and dont pretend to now. To me its ALL a bunch of BS, buy PM's and non precious metals, let these clowns flip their guarantees back and forth on the deck of the Titanic if it makes em feel better.

RobotTrader's picture

Unreal how we have 3% 10-yr yield and essentially "free" money on the short end and retail and REIT stocks skying today.  I'll have to say this is manipulation at its finest and other central bankers must be green with envy.

slewie the pi-rat's picture

we do have the best banksters, don't we?  they kick ass!

RobotTrader's picture

Anyone in March 2009 who told me that Coach could run from $11 to $65 after the most spectacular credit bust in history would have been heaped with scorn and derision.

I now have been humbled and learned that the power of the Fed is infinite.

slewie the pi-rat's picture

rilly!  you're not even getting junked, RT.  strange and humbling times...

Gold Man-Sacks's picture

So is your misguided imagination. 

ElvisDog's picture

What a load of crap. He basically said "anything is possible". The Fed doesn't control the yield on the 10-year note, right? As long as that is true, there is no way yields on the 10-year go down to 1%. Additional QE would increase yields, not decrease them.

citta vritti's picture

Sorry, ED, this is the Twilight Zone. You remember, we control the horizontal, etc.

slewie the pi-rat's picture

adjusted for inflation, we are pretty dipped, right now!

TooBearish's picture

Poor bond managers who thought they we doing the right thing by beinig short duration (IE short their benchmark indexes) are getting totalled and force to buy the top so that they are even up on their bogeys for month end reporting...ha ha ha!  Whos winning?

PulauHantu29's picture

Baskin Robbins should have a new ice cream cone called, "The Triple Dip"...they say it's a Double Dip with loads of inflation, i.e., another scoop.


kito's picture

bobbing along the waves of stagnation, nothing more than that

chunkylover42's picture

"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"

Holy run-on sentence, batman.  Seriously though, good post.

Instant Karma's picture

The 10 year UST is pricing in a growth slow down or recession. Stocks will follow soon enough. That will widen the Annual Budget Deficit as tax receipts drop even further and the temptation to expand/extend entitement programs like unemployment insurance grows. In short, except for the Anime, we are Japan. 21

Gold Man-Sacks's picture

I just love how when the economy tanks, people run to "safety" in treasuries.  So, if the economy's a disaster, and the taxes stop rolling in, how are those treasuries supposed to pay out?  Only in printed, worthless dollars I guess.  What the hell is wrong with people?  It's no wonder Peter Schiff is so frustrated.  As he said, in 2008, people ran towards the blast.  EPIC FAIL, sheeple.  BAHHHHHHH!

Yen Cross's picture

 Bonds have buddies. Corporate Bonds. The fed has made borrowing costs so cheap, Microsoft can borrow against it self and still make money.