Jeff Gundlach just did an amazing job explaining the violent volatility in credit markets in recent weeks.
The market in subprime mortgages had been quietly melting down since late last year, according to Gundlach, CEO at asset manager DoubleLine Capital.
The Federal Reserve’s sale of its AIG Maiden Lane II portfolio assets had been creating too much supply for the market to digest. Although the initial auctions went well, the later ones ran into serious trouble. Many assets saw no bid at all.
Then the New York Fed on Thursday signaled it was willing to slow down the sales, Greece agreed to the austerity plan demanded by the IMF as a condition for the next tranche of bailout funds, and Bank of America announced that had reached a settlement on its old securitized mortgages. And the market kicked into high gear. The ABX derivatives index that tracks subprime rose 14 percent in a week.
“I’ve got to believe that there’s a lot of losses" at bank trading desks, Gundlach said.
The volatility was “almost random number generation,” Gundlach explained. “It’s impossible to make money hedging that kind of volatility.”
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