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"New Bond King" Gunrake: the Fed is just delaying a crisis.
Jul 7,2020 08:30CST
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SMM: over the weekend, the CEO of (DoubleLine Capital), a two-line capital with $135 billion under management, is known as the "new debt king". Ganglak pointed out in an interview that the Fed "propped up the economy" through feats such as borrowing and bond purchases, which did ease market volatility during the public health crisis, but it may undermine market pricing.

Since the outbreak of the public health incident, the Fed has spent trillions of dollars to support the economy, including buying large amounts of corporate bonds, and these efforts have indeed rescued the shaky market from the plight. But it also sent the Fed's balance sheet soaring to more than $7 trillion.

Gunrake expressed shock at the aggressive lending actions of Fed policy makers:

The Fed has decided to go all out to reduce market and economic volatility. They have gone farther than ever before. But if the second wave of health events breaks out and triggers another decline in the market, then the Fed is likely to take more aggressive measures. "

To save the economy, the Fed released liquidity to the market and used tools such as buying corporate bonds, which Mr Gondrack criticized as a violation of the Fed's charter: "the Fed thought the market at that time was desperate, so it needed to take unconventional measures." but this violates the Federal Reserve Act of 1913. "

To make matters worse, the Fed's move will have serious consequences.

The 60-year-old bond investment legend with 35 years of investment experience has gone through many crises in his trading career. He was one of the few investors to warn before the 2008 subprime crisis after saying that the corporate credit crisis was imminent and that the company's paper debt levels were at an all-time high.

In the latest interview, he mentioned his concerns again.

The key risk, Gunrake points out, is that a large portion of the investment-grade corporate bond market is at the lowest level of BBB, the lowest credit rating, and these bonds can easily turn into junk bonds:

"too much corporate bond issuance has pushed up bond prices so much that people who hold this basket of assets may end up losing principal."

The Fed's bond-buying program kept bonds fluctuating within target prices, leading to a frenzy in the corporate bond market. However, this is dangerous.

Citing LQD exchange-traded funds as an example, he points out that BBB-rated bonds do not have much return, but there is a high risk that they will be downgraded to junk status. Once their ratings are downgraded, their pricing will be seriously affected.

It can be said that the Fed's massive asset buybacks are only delaying the wave of defaults. But if it does, the collapse of the credit markets would be "much more serious" than the consequences of the 2008 financial crisis. Now, signs of bankruptcy are emerging: "some leverage-intensive assets, such as mortgage-intensive real estate investment trusts and other types of investments, seem to be on the verge of bankruptcy."

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