Gundlach ? Where to Expect the Next Crisis

Jeffrey Gundlach

Unless there is a crisis, don’t expect a major decline in interest rates, according to Jeffrey Gundlach. And if such a crisis occurs, Gundlach warned, it will most likely take place in India.

India is over-reliant on foreign capital to finance its trade deficit and oil imports, Gundlach said. That makes it vulnerable to inflation, higher interest rates and devaluation of its currency. It also makes it vulnerable to the Federal Reserve’s quantitative easing (QE) policies – especially the Fed’s tapering, which weakens the rupee against the dollar.

Ray Dalio, founder of the hedge fund Bridgewater Associates, has raised similar concerns about India.

Gundlach said it is unlikely for the benchmark 10-year Treasury yield to fall below 2.75% absent such a crisis. Market sentiment would have to “crack,” he said, and “it is not going to happen without a catalyst.”

For now, bond investors should not fear the worst. “The momentum to higher bond yields is clearly slowing,” he said.

Gundlach spoke via conference call with investors on Sept. 10. He is the founder and chief investment officer of Los Angeles-based Doubleline Capital. Copies of the slides from his presentation are available here.

I’ll discuss Gundlach’s fears about India, but first let’s turn to what he said about the U.S. economy and markets.

Monetary policy and the bond market

Rising interest rates are not being driven by inflation fears or fundamentals, according to Gundlach. Commodity prices have been down slightly and are now heading sideways – with no indication of inflation. He said GDP growth would need to return to 3% to provide fundamental support for rising rates.

Instead, bad market sentiment and momentum are at play in the bond market, he said — and “bad sentiment can stay bad for a while.”

Like virtually every other observer, Gundlach attributed the rise in interest rates since May to the Fed’s talk of “tapering” its QE. But that is not what he predicted earlier in the year.

Early in 2013, Gundlach said that he had expected the Fed to follow Japan’s and Europe’s policies by “pegging” its QE policies to the 10-year rate. Japan, he said, has pegged its QE in order to keep its 10-year bond yield at approximately 75 basis points. Europe has calibrated its QE to keep yields on its peripheral countries’ debt to “acceptable levels,” he said.