Not only is the Trump rally over, but stocks are the last to get the memo. That's the current market summary according to DoubleLine's Jeff Gundlach who told Reuters that "there is a stealth flight to safety going on."
Among key indicators, Gundlach pointed to German Bunds and especially Schatz (2Yr), noting that "German bond yields are leading the way down," adding that "Gold is rising." He also warned that "speculators remain massively short bonds and the market is going to squeeze them out."
As we showed last Friday, the yield on German Schatz plunged to a record -0.96%. Earlier that day, Deutsche Bank's Jim Reid said "I've no idea why Bunds are rallying so hard at the moment."
That said, a simple reason for the collapse in German yields may have little to do with political risk or fear of the upcoming European elections, and everything to do with the ECB running out of eligible securities to monetize. As Citi's Jamie Searle calculated last week, the ECB needs to buy around EU80b in 1y-6y German paper by year-end, and as a result traders are merely frontrunning the ECB. As a result, Citi expects that not only will the 2Y tumble below 1% but the 10Y Bund yield will plunge again, dropping as low as -0.10%.
Back in the US, US yields have given up much of their "Trumflation", post-election gains, and on Friday, the 10-year traded at 2.32%, compared with 2.388% late on Thursday. Yields fell as low as 2.313 percent, the lowest since November.
Gundlach, who oversees $101 billion, first introduced his view on the 10-year yield's bottom in January. He then said on an investor webcast: "I think the 10-year Treasury will go below 2.25 percent ... not below 2 percent" before edging up again. As of this moment, we are just 7 basis point away from Gundlach being proven correct again.
As a result of the latest inflation trade unwind, Gundlach said the U.S. Treasury should consider issuing ultra-long-term obligations. "I’d issue the longest maturity Treasuries that the market accepts," Gundlach said. "Start with 40-year, then keep extending if the market allows it. Do 100 if you can get there. The timing is good right now." Of course, the mere hint that the US would so dramatically change its issuance calendar would very likely result in another steep selloff on concerns about duration realignment, and the sudden "unpredictable" shift in the world's deepest and most liquid bond market.
Meanwhile, touching on stocks which soared in the last minute - literally - of trading to close at yet another all time high, Gundlach noted that "stocks are out of sync with the stealth flight to safety. Lots of hope built in."
— Holger Zschaepitz (@Schuldensuehner) February 26, 2017
Back in December, Gundlach said that "the bar was so low on Trump to the point people were expecting markets will go down 80 percent and global depression - and now this guy is the Wizard of Oz and so expectations are high. There's no magic here." So far the magic remains, even if it is on the back of retail investors rushing into ETFs , even as the smart money is selling.
Despite the historical accuracy of Gundlach forecasts, DoubleLine's flagship Total Return Fund (with $54.7 billion in assets) has trailed its peer category so far this year, posting year-to-date returns of 0.70% lagging 73% of its peer category. However, if the like of Goldman are correct, and volatility returns to stocks in the coming days, leading to a wholesale flight to safety into fixed income, we are confident that DoubleLine will fade the gap with his competitors on very short notice.