Gundlach: Rates are Going Up
The history books will document that U.S. interest rates hit their secular bottom in July 2012, according to Jeffrey Gundlach. Although bonds prices have rallied in the first half of this year, he said they will continue to fall.
Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke to investors via a conference call on June 13. The focus of his talk was DoubleLine’s flagship fixed-total-return income fund, DBLTX. The slides from his presentation can be found here.
“Bond prices are not going up,” he predicted. “Yields have been rising since July 2012 in a certain sense,” he said, “and they have certainly been rising in a significant way since July 2016.”
“I wouldn’t buy bonds now,” Gundlach said.
Rates will go up this summer, but they won’t hit 3%, he predicted. He said the consensus is “probably right” that the 10-year will finish 2017 at approximately 2.8%.
In January, Gundlach correctly predicted that interest rates would rally to between 2% and 2.25%, and then would head higher. He said that is “still a good road map for 2017.”
Stocks, he said, will “level off” over the remainder of this year.
The title of his talk was “Small Change,” signifying the recent market environment where stocks have been “grinding upwards” while bonds have been “mostly in a trading range.” It also characterized the political environment, where he described the response to President Trump’s agenda as “rope-a-dope,” which is how Muhammad Ali tried to wear down his boxing opponent, George Foreman, in a title match in the 1970s.
Let’s look at his other comments about the economy and the market.
Diversify global equities
Central bank policies outside the U.S. are restraining the rise in Treasury rates. Gundlach said that Mario Draghi and Haruhiko Kuroda in Europe and Japan, respectively, are in “full-on Kool Aid drinking mode” with low interest rates and quantitative easing (QE). With rates elsewhere in the world being artificially repressed, it is pushing investors into U.S. Treasury bonds.
Gundlach said it was odd that Draghi and Kuroda are so much more dovish, given similar economic conditions in Europe, Japan and the U.S. He said the Eurozone PMI (an indicator of the health of the manufacturing sector) is “booming,” as is consumer spending and loan growth.
He said that in January, and throughout the last couple of months, he advised that investors “peel off a portion of their S&P 500 exposure” and move it to Europe or, even better, emerging markets. Gundlach said that this strategy has worked, and that he still recommends it because it has “has long-term legs.”