REUTERS/Jim Young
- Two billionaire "Bond Kings" seem worried that the banking fiasco will spark a credit crunch.
- Bill Gross warned soaring interest rates have hit banks' financials and made lending riskier.
- Jeffrey Gundlach noted lending to small businesses has tightened to financial-crisis levels.
Bill Gross and Jeffrey Gundlach appear to be bracing for a credit crunch as surging interest rates and banking fears threaten to strangle lending.
In response to inflation hitting 40-year highs, the Federal Reserve has raised rates from nearly zero to upwards of 4.75% since last March. Gross, Pimco's cofounder and the former boss of its flagship Total Return fund, warned in a Tuesday tweet that hiking at that speed and scale inevitably hits banks' finances and increases lending risks.
"Fed's Williams dismisses link between rate hikes and bank stress !!!!" Gross wrote, after New York Fed President John Williams said he didn't believe rising rates were responsible for the collapse of Silicon Valley Bank and Signature Bank in March.
"Rather unbelievable," Gross continued. "450 basis points and more rate hikes in 12 months time are bound to affect balance sheets that use proper accounting — duration and credit as well."
Gross — who shares the "Bond King" moniker with Gundlach — likely meant that higher rates have eroded the value of banks' bonds and other assets, and exposed lenders to greater risk of loan defaults.
Meanwhile, Gundlach noted in a Tuesday tweet that small businesses are finding it as costly and difficult to access credit today as they did at the height of the financial crisis.
"The NFIB Small Business Credit Conditions Index is plummeting (not surprisingly given recent bank failures) and it is now in the same place it was in late 2007/early 2008," the DoubleLine Capital CEO said.
The two billionaire investors seem worried that banks — spooked by the tidal wave of withdrawals that hit SVB and the blow to their bond portfolios over the past year — may tighten their lending standards and charge more interest in anticipation of further turmoil.
That could translate into a wider credit crunch that squeezes consumers, starves businesses of cash, and tanks the US economy.
Gross and Gundlach recently raised the alarm on an imminent downturn. Gross urged investors to be careful as he expects a recession shortly, while Gundlach flagged "red alert recession signals" in the bond market.