Gundlach: China Another Reason For No Rate Hike

Bond guru says China stock rout another hurdle for Fed.

Reviewed by: Jennifer Ablan
Edited by: Jennifer Ablan

NEW YORK (Reuters) – DoubleLine Capital Chief Executive Jeffrey Gundlach still believes the U.S. Federal Reserve is unlikely to raise interest rates this year, given the Greece and Puerto Rico crises and commodity selling fueled by China's market slump.


Gundlach, reiterating his Federal Reserve call first made in early May, said on a client webcast on Tuesday that odds of a Fed rate increase in September are now less than 25 percent.


“I don't think the Fed is going to raise rates in September," said Gundlach, who oversees $73 billion in assets at the Los Angeles-based investment firm.


Gundlach told Reuters in a separate interview earlier Tuesday: "China tanking off of its Nasdaq 1999-like frenzy is reverberating. Also, Greece leaving the euro is a much bigger deal than the cover-their-ears-and-hum perma-bull crowd wanted to perceive it to be. Copper had been giving the 'economic improvement' argument some legitimacy. But now it's at the low of the year and dropping like a stone."


In his June 9 webcast, Gundlach then said Treasury yields would peak in the next couple of days with the auction supply. "The 10-year yield should peak around 2.5 percent. People who sell their bond funds this week will be buying them back at lower yields." Indeed, Treasurys have rallied strongly with the new developments in China, Greece and Puerto Rico.


Tuesday, the yield on the benchmark 10-year Treasury note traded around 2.25 percent.


Gundlach, who is referred to as the new "King of Bonds" for his series of prescient investment calls, said on the latest webcast that he still holds Puerto Rico pension payment-backed munis.


However, Gundlach said: "We own zero Puerto Rican munis in any of our bond funds." The Puerto Rico bonds are "very interesting, but too risky for these funds."


Gundlach has argued that he favors Puerto Rico pension payment-backed munis because the government is unlikely to default on these securities despite their poor legal protection because they are held mostly by local residents.


Jennifer Ablan is a staff writer for Reuters.