- Regional banks will be under threat until the Federal Reserve cuts interest rates, according to Jeff Gundlach.
- “Deposits are going to keep drifting out” until that happens, the billionaire bond investor said Wednesday.
- Gundlach’s comments came as California lender PacWest’s share price plunged 50% on news it’s exploring a sale.
The turmoil rocking the US regional banking sector won’t end until the Federal Reserve starts slashing interest rates, according to billionaire bond investor Jeff Gundlach.
The DoubleLine Capital CEO said Wednesday that customers will likely carry on pulling their deposits from smaller lenders until benchmark borrowing costs start to fall from their current level of around 5%.
“Deposits are going to keep drifting out, I don’t think that this is the last chapter in this regional banking problem… I don’t really see what’s gonna make it stop unless the Fed cuts interest rates,” Gundlach told CNBC’s “Closing Bell”.
The Fed has aggressively raised rates over the past year in a bid to tame soaring inflation – but that’s rattled the US’s financial sector.
Silicon Valley Bank collapsed in March after disclosing that the rate hikes had fueled massive losses on its bond portfolio, and that sparked a rush of outflows from other regional lenders.
Customers have either been switching to larger banks or taking advantage of higher returns from other assets like Treasury bonds or money-market funds, with the Fed’s tightening campaign pushing up yields significantly over the last year.
“People are pulling money out because there’s absolutely no reason to keep their money in,” Gundlach told CNBC.
“You can get higher interest rates by a lot thanks to the Fed’s 500 basis point interest-rate increases, you could get Treasury bills at 5.2% for a couple of months,” he added, referring to yields on 2-year US Treasury notes spiking to that level in early March.
Gundlach’s comments came the day the central bank raised interest rates for a 10th time in a row – and California lender PacWest looked set to become the latest victim of the banking turmoil.
PacWest said in a Wednesday statement it has been “approached by several potential partners and investors”, confirming an earlier report from Bloomberg that said it was considering a range of options, including a sale.
The news sent the Beverly Hills-based bank’s shares tumbling by 44% to trade at $3.55 in premarket trading Thursday.