Jeff Gundlach thinks that housing looks vulnerable right now, and it could be the “Achilles Heel” of the economy. The legendary bond trader made the comments on CNBC’s “Fast Money Halftime Report” earlier today. According to Gundlach, the softer than expected housing data that has arrived recently shows real weakness in the sector.
During the interview, Gundlach discussed his view of the general market along with Federal Reserve policy, and what might provide the impetus for a move in interest rates in the short and medium term. The manager of Double Line funds said that he can see ten year bonds hitting 3.10% by the end of the year.
Gundlach on Interest rates
After that upward move, Gundlach doesn’t expect treasury bonds to rise much higher. According to the bond expert, the likely tapering of the Federal Reserve quantitative easing program will cause interest rates to head higher through the end of the year. He sees the interest rate eventually reaching 3.10% by the end of the year.
On today’s market those interest rates were sitting at around 2.75%. Unfortunately for fixed income investors, the rise in interest rates will not be sustained. Gundlach does not see the likelihood of the rates rising higher than that any time soon. The fund manager likens the coming change to 1994, when a big sell-off resulted in a jump in rates, and then a lull for some months before gradual growth.
Gundlach still thinks there’s a lot of yield to be had in the bond market, however, he just doesn’t see much hope in treasury bonds right now. Gundlach said that closed-end bond funds and Mortgage Real Estate Investment Trusts are trading at a discount right now, and they’re providing good yields to boot.
Economy not ready for higher interest rates
In order to see the treasury bond yield rise, the economy would need to see some major improvement, according to Gundlach. The state of the economy right now just doesn’t support advances in interest rates, leaving the 10 year bond rates stagnant through the end of the year, after their initial rise on QE tapering.
Stocks will fall when that tapering begins, according to the hedge fund manager’s comments, as the safety net begins to recede from below traders. QE tapering is the big theme on the market, and Gundlach sees little else moving treasuries in the medium term.