Gundlach Rate Call Still Spot-On

Bond guru still persistent that the Fed is in no position to raise interest rates.

For nearly two years now, macroeconomists and market pundits have been calling for higher interest rates in the U.S. Heading into 2015, the conventional wisdom said that the 10-year Treasury yields would hit 3 percent by year-end thanks to Federal Reserve monetary tightening and economic growth.

Swimming against the tide all along has been fixed-income guru Jeffrey Gundlach.

Last October, at ETF.com’s Fixed Income Conference, the CEO and CIO of DoubleLine Capital said that deflation had made the U.S. economic environment “different” than during past recoveries, and because of that, the Fed would not raise rates anytime soon.

“Everyone is always saying rates will rise; it is almost comical,” he said at the conference last year. “We are supposedly entering the tightening cycle years after the recession trough. That is historically unusual, but I still don’t think we are going to see the tightening soon.”

Forward those comments 12 months, and 10-year yields are still hovering at 2 percent—roughly where they started the year, and after dipping as low as 1.67 percent in February.

Beating The Same Drum

Throughout this year, Gundlach, who is again a keynote speaker at ETF.com’s Fixed Income conference on Nov. 4-5, has been reinforcing that view, calling market consensus stubborn, and noting that the Fed has had no fundamental reason to tinker with interest rates.

“The Fed doesn’t have any fundamental reason to raise interest rates, but it’s very nervous about being at zero for so many years, and how it ties its hands, should the economy weaken, which appears to be happening globally,” he said in a recent interview.

“If you look at commodity prices, and you look at emerging market equity prices, and you look at junk bond prices, and you look at U.S. nominal GDP, you would probably expect—looking at only those four things—that the Fed should be easing, not tightening,” Gundlach said.

To investors, his contrarian call a year ago was to invest in the long part of the Treasury curve, and the dollar.

If you look back, what was one of the most shunned assets at the beginning of 2014 due to its high sensitivity to interest rates, 30-year Treasury bonds went on to have one their best years in 2014.

In the past 12 months alone, as people braced for higher rates that never came, a fund like the iShares 20+ Year Treasury Bond ETF (TLT | A-83) rallied more than 6 percent—delivering roughly the same returns the U.S. stock market shelled out.

Chart courtesy of StockCharts.com

The Dollar Is Strong

The dollar has remained strong as countries around the world turn to devaluation of their currencies as a way to spark economic growth—which, globally, is averaging only 1 percent, according to Gundlach. The latest country to join the wave of devaluations was China—a country that had its currency support an implicit peg to the dollar for years.

“We’ve been of the view, for nearly three years now, that we entered a world in which currency devaluations were going to be the norm,” Gundlach said.

“What it means is that the U.S. competitive position in certain industries, and for multinationals, is getting more challenging,” he added. “It also means that the U.S. inflation rate is going to have a hard time gaining traction, because a strong dollar is obviously a vehicle to import deflation, or at least disinflation.”

Gundlach’s spot-on outlook will again be put to the test next week when he and other market luminaries descend on Newport Beach, California, for ETF.com’s Fixed Income conference.

Contact Cinthia Murphy at [email protected].