March 17, 2015
by Robert Huebscher
Since its inception in January 2012, the long book of the Voss Value Fund, Voss Capital's flagship offering, has substantially outperformed the market. The long/short equity fund has turned every $1 invested into an estimated $13.37. Over the same time frame, every $1 invested in the S&P 500 has become $3.66. Q1 2021 hedge fund Read More
Even if the Fed raises short-term interest rates as many expect it to, longer-term bond investors won’t face a decline in prices, according to Jeffrey Gundlach. Indeed, the market may have already priced in the effect of rate hikes, he said.
Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke to investors via a conference call on March 10. Slides from that presentation are available here.
“It’s more likely that the 10-year Treasury dips below 2% than it goes up as high as 3% during the course of 2015,” Gundlach said.
The 10-year closed at 2.14% on the day he spoke.
Gundlach reiterated his belief that raising rates would be a mistake due to the weak global economy and low inflation. Even if the Fed were to take that step, he said, it would eventually be forced to reverse and lower rates, as several European countries have had to do after attempting premature rate increases.
“I’m afraid that the Fed is intent on being a blockhead and raising interest rates against this backdrop,” he said, “and further strengthening the dollar, weakening the economy, weakening corporate earnings, and basically having to reverse policy.”
Demographic problems and the growth of the federal deficit will push rates higher, he believes, but that might not occur for another five years. Gundlach also boldly predicted an inglorious fate for Detroit’s automakers.
I’ll first look at his views on Fed policy and how it will play out in the bond market and then his assessments of valuation in various asset classes.
The factors driving bond prices
Weakness in Europe’s economy is driving down rates. Gundlach said that $2 trillion of global bonds now have negative yields and another $2 trillion have marginally positive yields of just a few basis points. Quantitative easing (QE) by the European Central Bank (ECB) will push yields even lower, according to Gundlach.
With the strengthening of the dollar, Gundlach said there is an “overwhelming interest rate differential” that will “put a lid” on U.S. Treasury yields, as investors favor those bonds over their European counterparts.
“These European bond yields sure are low but they are not likely to rise,” he said, because the ECB’s QE has depleted the supply of investment-grade bonds and will do the same for European sovereign debt. That, in turn, will further support the dollar against major developed-market currencies, he said.
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