Per usual, Gundlach has an idiosyncratic view of where markets are headed in 2015. Like virtually everyone, he expects the Federal Reserve to begin raising the federal-funds rate this year, but he predicts that the impact will be the opposite of the conventional wisdom. To wit, longer-term bond yields will, in fact, decline rather than rise as a result of a surprising flattening of the yield curve, he argues.
Where the median economic forecast tabulated by Bloomberg for the 10-year U.S. Treasury Bond yield for year-end 2015 currently stands at 3.24%, Gundlach thinks the 10-year that finished 2014 at 2.17% could potentially take out its modern-era low of 1.38% yield hit in 2012. This would particularly be the case if crude-oil prices keep falling to, say, $40 a barrel from their 2014 year-end level of about $55. This further drop from the 46% decline suffered by crude in 2014 would only accentuate deflationary forces he sees at work globally that continue to drop long-bond yields.
Gundlach says he’s constantly asked “how low oil prices can go,” and he responds that no one will know until they stop falling. “That answer isn’t meant to be cute,” he says. “When you have a market that showed extraordinary stability for five years — trading consistently at $90 [a barrel] or above — undergo a catastrophic crash like this one, prices usually go down a lot harder and stay down a lot longer than people think is possible.”