Jeffrey Gundlach, the analyst who predicted Trump’s win already back in January, expects U.S. bond rates to reach 6% in the upcoming years thanks to Trump's controversial policies.
The immediate result of Donald Trump’s win in 2016 U.S. Presidential Election last week was a jump in U.S. 10-year Treasuries to 2.15%, the highest level since January marking an end of the downward trajectory the bonds had been trapped in over the last 3 years. But in just two days after the elections, the global bond market lost more than $1 trillion due to the market fears that Trump's administration would favor business investment and spending but worsen the inflation rates. BofAML's Global Broad Market Index lost 1.18% for the first time since June 2015 and showed losses equivalent to more than $1 trillion last week, reports Reuters.
Barron’s held an extensive interview with Jeffrey Gundlach, CEO of DoubleLine Capital and Wall Street’s “bond god”, who was one of the few analysts rightfully predicting Trump’s win over Hillary Clinton in this year’s presidential race. Now that Gundlach’s shocking prediction turned out to be true, the analyst warns the investors about yet another market change that has already started developing across the global markets. Gundlach predicts an increase in bond yields that, in turn, will lift the yield on the U.S. 10-year Treasury up to 6% in the next 4-5 years thanks to “unfriendly environment” arising from Trump’s presidential agenda.
The reason for such a dramatic prognosis, according to the analyst, is Trump’s pro-business agenda that will result in stronger economic growth but also in elevated inflation. Gundlach adds that Trump’s numerous infrastructure projects will worsen the U.S. deficit as the president-elect promised to dedicate higher budgets to infrastructure development and his other programs. And this is likely to produce an inflation rate of 3% with a 4% to 6% nominal growth in GDP.
“If nominal GDP pushes toward 4%, 5%, or even 6%, there is no way you are going to get bond yields to stay below 2%,” said Gundlach, as reported by Barron’s.
In addition to that, the analyst says there could be a “tradable rally in the bond market” before the end of 2016, however, a long-term trend in bonds is most likely to be higher.
“The idea that inflation and interest rates can never go up is a very tired narrative, born of years of stability in both,” he said.
Considering that Gundlach is one of the most respected and successful bond investors in the world, the latest investment activity of his firm, DoubleLine Capital, could serve as a good example for bond investors alerted by the global bond market behavior. Gundlach's firm is managing a $106 billion portfolio and specializes in buying/selling bonds and TIPS. The latter ones, Treasury Inflation-Protected Securities, are Gundlach's new favorites, reported Barron's.
TIPS get increasingly more attractive in the situation when bonds are falling out of favor. In the week ending November 9, TIPS received more than $1 billion in investments, which is the second-biggest inflow since 2002, reports Reuters. Barron’s adds that Gundlach himself substituted DoubleLine Flexible Income fund’s (MUTF: DFLEX) treasuries with TIPS, which is a major swap for a company with such a large portfolio. In his other fund, DoubleLine Core Fixed Income fund (MUTF: DBLFX), treasury bonds were also swapped for TIPS. This move allowed both funds to outperform their benchmarks this year, which is a very good sign for bond investors worried about the change in the bond market with Trump’s presidency.
Next to that, Gundlach said that his opinion regarding the future of the stock market during Trump's presidency was still uncertain because of the many conflicting policies presented by the president-elect such as pro-growth initiatives and higher rates. However, this is not likely to bring anything positive, he said.
“The structure of the US economy and the pricing of the stock market are predicated on 1.5% Treasury yields and zero short-term interest rates” Gundlach said.
Interestingly, several other prominent analysts had supported Gundlach's bearish outlook of the bond market during Trump’s presidency even before the official results were announced. Australia’s Business Insider mentions Goldman Sachs (TOCOM: Futures On Gasoline Feb 2017 [GS]) predicting U.S. 10-year Treasuries to reach 2.5% in 2017 whereas Bloomberg cites a former Fed chairman Alan Greenspan saying that the rates are heading towards 5%.
“If the early stages of inflation, which are now developing, would take hold, you could get -fairly soon - a fairly major shift away from these extraordinarily low yields on 10-year notes, for example. I think up in the area of 3 to 4, or 5 percent, eventually. That’s what it’s been historically,” Greenspan told Bloomberg one day before the elections.
Overall, even though Trump’s presidency could mean a stronger U.S. economy in the short term, it is likely to bring the level of debt to GDP to "unacceptable" levels in the long-term, say the analysts. In the past days, Trump's win only accelerated the trend of rising bond yields that had been around for some months but waited for that last push.