Why Gundlach Is Still Wrong About Higher Rates

Last Monday, Jeff Gundlach, famed bond fund manager and CIO of Doubleline, made an interesting comment during an interview with CNBC when he stated that the 10-year Treasury yield would top 6% by 2020 or 2021.

6% would be the highest yield since 2000.

The chart below shows Gundlach’s estimated yield as compared to the long-run range of economic growth. (Note that real GDP growth was running at 5.27% in 2000 as compared to 3.0% today which is also getting weaker.)

As I discussed last week, interest rates are a function of the economy. So, while Jeff suggests that yields are rising to 6% in the next couple of years, such would suggest an extremely strong rebound in economic growth. Unfortunately, there is no evidence currently of a major upturn in economic growth due to surging deficits, debts, demographic, and employment trends. Further productivity trends mean such an upturn in economic growth could only come from a massive surge in debt. Is that likely to happen given our indebted state already?

The biggest problem with rising rates is the negative impact from higher borrowing costs. Given that consumption makes up 70% of economic growth, and that consumers are heavily indebted, a change in rates has an immediate impact to consumption. Take a look at the chart below of the Total Housing Activity Index versus 30-year mortgage rates.