Gundlach: The 10-Year Is In A “Zone Of Death”

Gundlach: The 10-Year Is In A “Zone Of Death”
Jeff Gundlach photo courtesy and with permission - DoubleLine Capital

The yield on the 10-year Treasury bond has been tightly coiled in a “zone of death,” Jeffrey Gundlach said. Since the start of the year, it has traded between 2.4% and 2.5%, but it is poised to rally to 2.25% before it retreats to 3.0% by the end of the year, according to Gundlach.

Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital, a leading provider of fixed-income mutual funds and ETFs. He spoke to investors via a conference call on March 7. Slides from that presentation are available here. This webinar was focused on DoubleLine’s flagship Total Return Bond Fund (DBLTX).


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Jeffrey Gundlach

“Sentiment and short positions are set up for a rally,” he said, but the 10-year has “gone sideways, anchored around 2.5%.”

The big change for 2017, he said, has been that the bond market is showing a lot more “respect” for the Fed. Instead of Fed policy being dictated by the direction of the bond market, now the market is moving in response to Fed pronouncements.

That is evident, he said, in the increase in the 10-year breakeven rate (the difference between the yield on a nominal bond and the TIPS rate). It has gone from approximately 1.5% to 2% since the middle of last year, signaling that the market believes the Fed will continue with its rate hikes and inflation will increase.

The other significant development he noted was that the global economy has undergone its most synchronized upturn in the last seven years. Since the middle of last year, the Citibank surprise index, which tracks how economic indicators are doing relative to expectations, has risen steadily for the U.S., the Eurozone, emerging markets, other major economies, Latin America and the Asia/Pacific region.

Let’s look at what else Gundlach had to say about the economy and the capital markets.

Worry about inflation, but not a recession

In his previous webcast, Gundlach said the U.S. usually enters a recession in the first term of a new presidency, although one was not imminent. Now, the chances of a recession are even more distant.

“We don’t see a recession on the horizon,” he said.

Gundlach cited a number of economic indicators that have strengthened over the last couple of months, including small business confidence and manufacturing and service ISMs. The Conference Board leading economic indicators (LEIs) are strong, he said, and economists have not downgraded their estimates of GDP growth, as they have in the post-crisis period.

Nominal GDP growth is now forecasted at 4.7%, which reflects higher inflation expectations. Inflation expectations, he said, could be driven by a fear of tariffs on imports. He noted that cars and car parts are the most widely imported item by the U.S. from the rest of the world. He said a tariff on autos could drive car prices 10% higher.

Indeed, with inflation at or above 2% and unemployment below 5%, the Fed’s targets for raising interest rates have been met. “There are no more excuses not to raise interest rates,” he said.

The bond market predicts a 96% chance of a March rate increase, he said, a 50% chance of a hike in June or July and a 33% chance of another one later in the year. The market is forecasting “two-and-a-half rate hikes this year,” he said.

By Robert Huebscher, read the full article here.

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