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DoubleLine's Hsu: Rate cut 'unhelpful', signals Fed 'running out of ammo'

Julia La Roche
Correspondent

DoubleLine Capital’s Andrew Hsu said on Tuesday the Federal Reserve’s emergency rate cut to combat the economic effects of the coronavirus (COVID-19) might fuel investor uncertainty — something the market has more than enough of already.

Amid growing concerns surrounding the COVID-19 viral outbreak, voting members of the Federal Open Market Committee unanimously agreed to an inter-meeting rate cut by half a percentage point — the first inter-meeting cut since the 2008 financial crisis.

However, stocks took a beating after the unexpected move, with the Dow (^DJI) giving back half its gains from Monday’s record gain. Meanwhile, Treasury yields (^TNX) briefly sank below 1% for the first time ever, underscoring how investors think the Fed’s move won’t actually contain the virus’ impact.

While the move to cut rates by the Fed was “well-telegraphed,” the timing of the 50-basis points inter-meeting cut on Tuesday “caught the market off guard,” Hsu, the co-portfolio manager of the flagship DoubleLine Total Return Bond Fund (DBLTX), told Yahoo Finance on Tuesday.

“There’s a lot of uncertainty in the market. I don’t think what the Fed did in terms of cutting interest rates inter-period was helpful in terms of bolstering confidence in the market,” he told “The Ticker” in an interview.

“As long as there’s uncertainty, I think investors will seek safer assets,” Hsu said, pointing to the rally in gold and bond prices, which pushed down Treasury yields. Hsu called the latter “very significant.”

Internally, DoubleLine, which oversees $150 billion in assets, had a threshold on the 10-year at 1.32, the previous low. The Los Angeles-based bond behemoth’s view was if the 1.32 low was tested, that the yield on the 10-year would head lower.

“Our view was 1. Now that we’ve breached 1 [on the 10-year] we need to reassess the situation here, but given the statement from the Fed and their previous actions reiterating that they would protect the economy, it’s to say there’s potentially more downside risk in rates,” Hsu added.

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At the next FOMC meeting, the Fed “may come to a conclusion” that the 50-basis points cut “wasn’t enough.”

“Unfortunately, we are running out of ammo here, so any other moves in the future, I think they need to be careful in how they react and how they telegraph this into the market,” Hsu said.

Hsu’s expectation is if the market persists in its selling spree over the next two weeks heading into the March 18 meeting, “certainly the idea of a further cut is plausible.”

“My expectation is if that’s the case and markets remain uncertain, I do think risk assets will continue to sell off, and investors will seek safer havens,” he said.

Julia La Roche is a Correspondent at Yahoo Finance. Follow her on Twitter


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