Bond guru Jeff Gundlach said that the recent rally in bond yields is unlikely to continue, thanks to the Federal Reserve. After hovering near 2 percent since last summer, yields on 10-year Treasury bonds reached 2.23 percent Wednesday, its highest level in more than a year. In July 2012, yields had fallen to 1.39 percent, according to CNNMoney.
The chief of DoubleLine Capital, which has about $60 billion of asset under management, said that the Fed will make sure that any increase in rates is controlled and slow. Dan Fuss of Loomis Sayles has a similar thought about bond yields. Gundlach and Fuss both reiterated that if the central bank fails, global economy will come under extreme danger.
Though some believe that the economy is self-sustaining, which means a lack of support for bonds, Gundlach says the whole financial system has been balanced on the shoulders of low interest rates. The Federal Reserve has been purchasing $85 billion worth of mortgage-backed securities and other assets every month to boost the economy and pull the rates down.
Recently, Ben Bernanke said pulling back the stimulus prematurely will hamper the economy. But he added that the central bank is closely watching economic data to determine how long it should continue with the stimulus. It scared a lot of bond investors because the economic data has started showing strength.
Jeff Gundlach Thinks QE3 Will Never End
Housing and auto markets have led the economic recovery. Any rise in interest rates will negatively affect both sectors, thinks Jeff Gundlach. If rates spike too quickly, they will push mortgage rates higher which will hamper refinancing and home buying. Jeff Gundlach thinks that the intervention by the Federal Reserve will continue in the long-term. That’s why he is a buyer of bonds with a duration of more than 10 years.
Jeff Gundlach admitted that you can’t be mad for something that pays just 2.1 percent for 10 years. But he thinks Treasuries are still reasonably attractive compared to other asset classes. A few days ago, Jeff Gundlach said the government’s quantitative easing program will last forever because the Fed has no plans to end it.
Gundlach said he expects bond yields to stay close to 2 percent, and the absolute highest level for 10-year bond yields won’t be higher than 2.4 percent this year. Dan Fuss thinks 10-year bond yields will reach 2.45 percent to 2.6 percent by the end of this year.