Gundlach: A “Big, Big Moment” for the Bond Market
The bond market is “sniffing out” an unfriendly change in the direction of interest rates, according to Jeffrey Gundlach. Rates are going up, he said, and investors should position their portfolios defensively for a long-term secular rise in rates.
“This is a big, big moment,” Gundlach said¸ and it won’t pay to “be cute” by trying to benefit from short-term price movements, since the dominant trend will be higher rates.
“It pays not to squeeze the last bit of juice out of the orange,” Gundlach said.
Gundlach spoke to investors on September 8 to provide updates on his flagship mutual fund, the DoubleLine Total Return Fund (DBLTX). He is the founder and chief investment officer of Los Angeles-based DoubleLine Capital, known for its fixed-income mutual funds, closed-end funds and ETFs. Copies of his slides are available to download here.
Gundlach said he has been recommending defensiveness all year, even though Treasury rates have gone down modestly.
The narrative that the Fed is committed to aggressively easy monetary policy will change in a way that is “bond-unfriendly,” Gundlach predicted. He explained that July 6 marked the recent low in rates, when the yield on the 10-year Treasury was 1.32%. Since then, yields have risen gently, which he said marks the beginning of the bond market “sniffing out” the fallacy of the idea that “QE will be with us forever.”
The yield on the benchmark 10-year Treasury closed at 1.60% on the day he spoke.
I’ll look at the two factors Gundlach said will be driving the rise in rates. But, first, here’s what he said about Fed policy and the economy.
The Fed’s dilemma
Economic indicators are not supportive of a rate increase, according to Gundlach. But that may not stop the Fed from embarking on one – or possibly two – rate hikes this year.
Gundlach said that such a move could reflect a desire on the part of the Fed to “blow itself up.” Gundlach did not say what he meant by that phrase; presumably he meant that the Fed would erode the market’s confidence in its abilities.
Nominal GDP growth is at a very low level, Gundlach said, typically associated with recessions.
GDP estimates are lower than any prior estimates in this decade, which is inconsistent with the idea that the Fed will raise rates, according to Gundlach. “The data doesn’t support a Fed rate hike,” he reiterated.
Gundlach said the ISM manufacturing index is low, and the ISM non-manufacturing index is at its lowest level since the Fed began its easy-money policies.
“Clearly this is a bad environment for raising rates,” he said, “yet some Fed members are talking about raising rates twice.”
Gundlach said the Fed is creating an “alternative universe” by saying it will look only at two indicators – unemployment and inflation.
The economy may not be strong enough to support a rate hike, but Gundlach doesn’t think it’s headed for a recession.