Slower growth in China and worries over central bank tapering is causing a mighty hurt in emerging economies. Developing country currencies have been dropping and emerging economy stock markets are having their worst early year performance since 2009. Tomorrow the Federal Reserve will begin a two day meeting and begin the sale of $111 billion of notes and floating rate debt. Given the skittishness internationally buying into the Treasury’s sale might not be a bad move.

In November 2013 I interviewed DoubleLine Capital’s brilliant bond manager Jeffrey Gundlach for a virtual conference we held for financial advisors. During our conversation Gundlach discussed the contarian view he had about interest rates. At the time, it was almost impossible to find an economist or market pundit who didn’t think interest rates were heading up. Gundlach made a convincing argument about why there was a good possibility that long Treasury rates could actually fall further as prices “melt up.”

Treasuries, according to Gundlach, remain the best investment in the world for high quality collateral (a must for heavily regulated banks) and safety (a haven for nervous investors and central bankers.) With renewed turmoil in the emerging markets, including a plummeting Argentinian peso, global investors are running scared. The 10-year Treasury yield hit an eight-week low today of 2.7% down from just above 3% at the end of 2013. Had you been smart enough to buy an ETF like the iShares Barclays 20+ year Treasury Bond fund (TLT) you would be up 4% in the last month compared to a 2% decline in an investment in the SPDR Dow Jones Industrial Average ETF (DIA DIA ).

Below you will find Gundlach’s prescient comments regarding Treasury prices and interest rates. As for stocks, Gundlach was cautious because of the prevailing risk-on, “Don’t fight the Quantitative Easing” complacency. Given the stock market’s recent drubbing, Gundlach’s instincts were again, spot on.

GUNDLACH. One of the consequences I think might be alarmingly contrarian for people is–one thing that seems clear is that, let’s just talk about the Untied States, the Fed buying a trillion dollars worth of Treasury bonds and guaranteed mortgages per year when the budget deficit is now less than a trillion dollars on a twelve-month trailing trajectory basis, they’re taking all the high-quality collateral or a great fraction of it out of the flow in the market. So there’s less and less high-quality collateral. There aren’t any more Triple A, or Double A even, corporate bonds, yet we have a financial regulatory system that seems to want to increase bank capital and increase balance sheet holdings of high-quality collaterals. These things are in opposite directions. You’re encouraging the financial system to hold more high-quality collaterals at the same time you’re taking it away.

I wonder if one of the most contrarian consequences of this could be that we actually have a melt-up in Treasury bond prices at some point. I mean, talk about something that no one is thinking about. In July 2012, I made the statement–which had been for a couple of decades one of the most dangerous statements in the financial markets–that we were at the on low interest rates for the 10-year Treasury. I mean, how many people have made that statement over the past 25 years, way too prematurely, but it just seemed to me that the movements of 2012 in the summertime were a perfect storm for what could have been the low, “the low,” the biggie, in 10-year Treasury yield. Weirdly, the yield today is about 100 basis points or 125 basis points higher than it was then. But I’m less convinced today that it was “the low,” than I was then, because of this concept of Quantitative Easing is eliminating all of the high-quality collateral or gradualistically shrinking it. And there’s this kind of regulatory need for it. Under a certain set of stresses in the system you can imagine where suddenly everyone has to buy it.

SCHIFRIN. SO THE MELT UP COULD MEAN EVEN LOWER RATES?

GUNDLACH. Sure. What if there was just a scramble and you had to own them? You know, fear and greed, people all know are components in psychology and markets. Typically, people say, I think correctly, that fear is stronger than greed. But there is one more thing that drives behavior, which I think is the most powerful and that’s need. When you need to do something, well need means you don’t have a choice.

So when you see, say, operating pools that must earn a few percentage points for budgetary purposes and yet rates are at zero, they need to take risk. A retiree who has a certain amount of capital and planning on living off of it needs a certain rate of return. Well, if you’re a bank and you need to have your balance sheet look a certain way and it doesn’t, well, then you have to make changes and when it’s a need-based thing, it can really become a scramble. So I’m not predicting that it’s a base case, that we’ll melt up Treasury bonds, but I think it’s one possible unintended consequence of years of Quantitative Easing that ultimately, maybe somebody actually wants these bonds other than the central bank or needs them. And then what happens? Well, the prices will need move higher.

SCHIFRIN: SO THE POPULAR WISDOM OF OH, THE RATES CAN’T GO ANY LOWER IS JUST MALARKEY?

GUNDLACH. Well, they’ve been lower in Japan. I don’t know if you want to make a direct correspondence between the U.S. and Japan. When I was thinking about we were at below interest rate, I went on CNBC and at the time, the 10-year Treasury was at 1.60, and I got in a little bit of an argument with one of the hosts who was absolutely convinced that U.S. 10-years were going to go way of Japan down the 1% because that had been the trend, that had been the place. These days, no one believes that anymore, but I suppose it’s just as likely as now that Quantitative Easing, being at the scale and duration it’s been, maybe it’s more likely than it was in 12 or 18 months ago.

I really don’t believe the ingredients are there for this great bond rout that everybody is talking about. But again, go back to what we talked about way earlier, zero interest rate policy, I think, has a lot to do with sculpting investor behavior and clearly, in my view, one of the main reasons why the equity market has been strong as it has been.