June 11, 2013
Don’t sell your bonds just yet, according to Jeffrey Gundlach. Global economic growth is slowing, he said, and the U.S. will be competing for a larger slice of a shrinking worldwide pie. A weaker economy dims the prospects for higher interest rates. The benchmark 10-year Treasury yield – currently 2.08% – will be 1.70% by the end of the year, according to Gundlach, providing profits for holders of long-term bonds.
“I like bonds more now with prices down and yields up,” he said. Yields on the 10-year have risen by about 40 basis points in the last month.
“It is a horrible time to be exiting bonds at this moment,” Gundlach said.
Gundlach spoke with investors via a conference call June 4. He is the founder and chief investment officer of Los Angeles-based Doubleline Capital. Copies of the slides from his presentation are available here.
Japan’s aggressive quantitative easing (QE) initiative and Europe’s recession will dampen growth in the U.S., he said. Inflation is not a threat, according to Gundlach. The Fed may slow its QE efforts, but it won’t back away from its zero-interest rate policy.
Let’s look at Gundlach’s forecast for the economy, outlook for Fed policy and preferred sub-classes of bonds.
A shrinking global pie
“The big problem that exists in the world today is declining world GDP growth,” he said. “Basically you are increasingly playing a market share game, trying to steal exports from other countries.”
Most of the growth, he said, is coming from the BRICs (Brazil, Russia, India and China) and other developing markets. Developed markets are contributing very little, despite QE efforts, which Gundlach does not expect to go away.
China is not contributing the 6% growth its reported statistics claim — Gundlach said its numbers are “fabricated.” Indeed, China is unlikely to support global growth to the degree it has over the last decade – Gundlach said it may face bigger problems. He cited a recent talk by the hedge fund manager Stanley Druckenmiller, who said that conditions in China are alarmingly similar to those of the U.S. in 2007, just prior to the financial crisis.
Gundlach said there is a worldwide trend of countries trying to protect their exports, with Japan leading the way. Its program of yen debasement, he said, is aimed at stimulating Japanese exports. Gundlach is concerned that Japan’s policies could escalate and lead to tariffs, which would destabilize the global economy.
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