Gundlach: A Big Moment for the Economy and the Markets

June 17, 2014

by Robert Huebscher

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The benchmark 10-year Treasury bond is an attractive investment, according to Jeffrey Gundlach, although its yield is likely to stay between 2.2% and 2.8% for the remainder of the year. Despite that narrow range, Gundlach foresees pivots in other parts of the investment landscape.

“This is a pretty big moment for the markets and the economy,” Gundlach said. “Emerging markets may be breaking on the upside. The Shanghai is at a decision point. I also see gold seems to be at a decision point.”

Gundlach spoke June 10 on a conference call with investors. He is the founder and chief investment officer of Los Angeles-based DoubleLine Capital.

A copy of Gundlach’s presentation is available here.

With the recent “bounce up” in Treasury yields, Gundlach said investors should “think about bonds.” The yield on the 10-year closed at 2.64% on the day he spoke, up from its low this year of 2.44% on May 28.

“I know that everyone thinks that bonds are terrible because of the low interest rates,” he said, “but most of those people missed some significant profit opportunities in long bonds that we referenced at the beginning of the year.”

I’ll look at what Gundlach said is in store for emerging markets, China and gold. But first, I’ll review what he said about the U.S. – including his seven reasons why interest rates have trended lower.

Seven reasons why U.S. rates have declined

“Almost nobody believed interest rates could fall during 2014,” Gundlach said, yet long-term government bonds have been the best-performing asset class.

Gundlach gave seven reasons for the drop in interest rates. First was something he talked about in prior presentations: Pension plans have taken advantage of the gains in the stock market to shift allocations toward bonds, to lock in funding of projected liabilities. That trend, he cautioned, “is largely behind us.”

Lack of supply – particularly in the long-term U.S. Treasury market – has also driven down yields. Gundlach said that central banks now hold a disproportionate share of those bonds, leaving very little float for mutual funds and other investors. In fact, he said that Barclays has now eliminated bonds owned by the Fed from its calculation of its aggregate-bond index.

Slow economic growth has contributed to weakness in yields. Gundlach said that “GDP really failed to pan out versus forecast, particularly in the first quarter.” He cited data showing that the consensus forecast was 2.75% until the beginning of this year, when those expectation started to decline – but never reached the actual number of -1%.

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