Bond Kings to be Dethroned in Second Half of the Year

EconMatters's picture

By EconMatters   


Jeffrey Gundlach`s Outlook


Jeffrey Gundlach of DoubleLine Capital LP says the 10-year U.S. Treasury note will likely trade in a range between 2.20 and 2.80 percent during the second half of year. Gundlach also said U.S. Treasuries are a buy for investors as they are yielding in the upper half of his projected trading range. He said this on June 10th of 2014 and it seems he still expects the 10-year yield to be lower than the 2.40% bottom put in about 3 weeks and 20 basis points ago. 


He runs primarily a bond fund, and he gets paid mainly on assets under management, so talking one`s book to encourage more inflows into the fund is very important for his business model. Therefore it is hard to know whether this is just ‘sales tactical speak’ or he legitimately believes that the 10-year hasn`t put in the bottom for not only this year but maybe for the next five to ten years and beyond as many on Wall Street believe.  


George Clooney Doesn`t Need to Take Profits


However, if he generally is drinking the Bond Kool-Aid, and who can blame him with all the craziness of central bank intervention, that means he didn`t take profits when many did at the 2.40% lows, as the same day yields were back at 2.47%, a 7 basis point move, and quickly moved another 25 basis points higher before settling back at the 2.60% level. If I were an investor in his fund I sure would have wanted him to take profits there ahead of another robust jobs report, a Fed meeting announcing continued tapering and maybe more tightening, and strong GDP numbers for the second quarter coming soon.


Don't Miss >> Gloom and Doom Sells



Bond King Knows Best versus Most Jobs Created Since 1999


But again Jeffrey Gundlach specializes in bonds so I am sure he knows best, but I would give him a friendly wager that the 10-year yield is higher than 2.80% over the next 6 months as our economy seems to be back-end predisposed to growth within a given year based upon everything from back-to-school retail spending, holiday supply chain drivers and football season.



I believe Gundlach is focusing too much on European Bonds relativity to US Bonds, and as Bank of England Governor Mark Carney said last Thursday U.K. interest rates could rise sooner than investors expect. This goes the same for US investors as the Fed could be forced to raise rates much sooner as Joseph LaVorgna, chief U.S. economist for Deutsche Bank recently put the robust job growth this year in context by pointing out that if we continue on this same pace of adding jobs to the economy more jobs will be created in 2014 than in any year since 1999.


Context for the Doom & Gloom Crowd


This is an amazing fact when you consider that anybody who could fog up a mirror was hired in the tech bubble running up to 2000. For all those who focus on the slow growth in the housing sector right now including Jeffrey Gundlach, remember that the jobs created this year are more than the 2003-2006 housing boom on an annual basis.



What Jeffrey fails to realize is that our economy has shifted from a housing based economy to a technology based economy; we are far healthier in the technology industry than we ever were in the 2000 boom era in technology. 


This fact is lost on a guy whose fund is based in California which seems even more short-sighted in our opinion. Besides Apple, Facebook, and Google even Intel, Microsoft and HP are showing some life with new leadership changes. We are on pace to create more jobs in this country than the tech glory days, the housing boom years, and the mortgage underwriting boom on a year over year comparison, and Gundlach thinks rates are going to stay below 2.80% for the second half of the year with the Fed exiting the bond market?



Joseph LaVorgna - Deutsche Bank Economic Forecast


Frankly there is a big difference between Europe and Japan on one hand and England and the United States on the other, the latter will be raising rates sooner than investors currently have priced into their models as Joseph LaVorgna states so succinctly: “In six months, the unemployment rate will be below 6% and the core inflation rate will be at 2%,” he said. “We are way ahead of schedule. We’re going to get to 5.2% or 5.4% a year ahead of schedule.” And that the “The Fed is behind the proverbial curve,” and “The Fed should be raising rates.” 


Inflation Expectations to Rise in Europe


Frankly when it comes to Europe I think investors were just an example of the ‘inmates running the asylum’ who wanted a bunch of free money from the ECB, their inflation rate was still 0.5% by their measures and probably much higher in real terms. 


Markets influence the Central Banks these days, and they keep begging hard and long enough eventually they force these weak central bank official`s hands within limits and have gotten their free capital. However, I think just as the Fed was raising the Fed Fund`s rate to 5.5% right before the financial crisis, the ECB decision on rates and other monetary stimulus measures is the last we will see for a long while. 


To be more specific, we have reached the end of the easing monetary cycle with the recent ECB fait accompli and this sets the stage for the next tightening monetary cycle. This tightening monetary phase which is upon us and will have to run its cyclical course will be at least 5 years in duration in our opinion. The Central Banks will be forced to pivot to the tightening cycle in order to combat rising inflation pressures.


At any rate, I expect Europe will be raising their equivalent to the Fed Funds Rate which currently stands at 15 basis points in 9 months as they are more concerned with inflation levels than employment levels, and any uptick in measured European inflation freaks them out!


The Inflation Era


We think the inflation cycle is finally upon us even in official measurements that Central Banks focus on now that the wage part of the inflation puzzle is set to take off as witnessed by Seattle’s $15 minimum wage law recently enacted and these wage pressures start to push through to the rest of the country. 


Wages are finally going up in all areas, not just the upper spectrum of employment. We are officially in the wage inflation cycle, and tightening monetary policy is to follow as the Central Banks are forced to cut off the free money supply. It is now going to start costing investors to borrow money which is a healthy thing in our opinion.




In summary, we believe Jeffrey Gundlach is wrong regarding the 10-Year Bond yield staying below 2.80% over the second half of the year as growth picks up and accelerates during the home stretch of 2014. We believe the Fed will be forced to raise rates before March 2015. Just like the Bank of England Governor Mark Carney`s recent market warning, Janet Yellen will be sending her own market warning over the next six months that she needs to move faster on rate hikes.


But that`s what makes markets, for every buyer there is a seller! And we are definitely sellers of bonds at these levels. We believe that anything below 2.60% in yield on the 10-year over the next six months represents a positive expected value proposition from yield appreciation over this time period.


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MFL8240's picture

Gundlach also said U.S. Treasuries are a buy for investors as they are yielding in the upper half of his projected trading range.


Doesnt matter that the country is bankrupt?

Renvyle's picture

The European interest rate differential isn't Treasuries to Gilts. It's Eurozone to Treasuries. That is obvious.

Woodrox's picture

this article is a cut and paste piece of crape'

what's that smell's picture

>>as our economy seems to be back-end predisposed to growth within a given year based upon everything from back-to-school retail spending, holiday supply chain drivers and football season.

did a retarded kindergardener write this sentence?

or is it the vomit of a badly coded algorithm?

sucking jeff gundlach's ass never smelled so sweet.

VegasBob's picture

Substantially higher rates = stock market collapse, bond market collapse, housing market collapse.


Substantially higher rates will happen only over Yellen's dead body...

andrewp111's picture

Rates may rise temporarily for any number of reasons. If they do, buy Treasury bonds to lock in the higher rates. Eventually, there will be another crash, and long term rates will go to zero.

Then, as the world progresses toward World War III, we will a sustained rise in both inflation and interest rates. But rates must crash before we get the new inflation era. As every silly rabbit knows, it is great wars that drive inflation higher.

Cdn1's picture


'we have moved from a housing based economy to a technology based economy...generating so many jobs' ??

How about one shred of evidence and statistics to back this up?

Are the guys in construction  all turning into computer nerds and geeks and only drinking 2 budweisers a night now?

There are so many tech jobs? so all the people leaving the labor force are just playing hard to get on their salary negotiations?

There has been an ongoing globalization of labor...including even customer service phone jobs being shipped out of the country.

America continues to go gray...older people spend less....we are still a consumer society...

This article is way off base

whidbey-2's picture

curse the nature of mankind, but jeff lives on his opinion and being wrong is no help.  A Gary Shilling is of bout the same view and it not for higher rates. Other bondsmen think that the Economy is growing. Show us soon. I think TNX does 138 before fall.  PITY we fools, nothing but money to consoul our selves with.

New American Revolution's picture

WoW!!!  Talk about kool-Aid, this dude has the market cornered.  Yellen isn't going raise rates in 2015 because America is in escape velocity, 5% indeed!  No, she's projecting rates higher in order to defend the plummeting dollar as the world starts pulling away from the dollar as the worlds reserve currency, and into the "gold basket."  She can see it, she just can't talk about it., and check out the book, The Science of Liberty at as a free pdf by Tuesday. Serfs Up America!

Handful of Dust's picture

House sales stagnant in the 'hottest markets' like West of Houston where job growth was formerly very brisk. Not sure why but sales have slowed to a snails pace there right now. Same with San Antonio where growth was 80% dependent on the military base spending there due to Bush's/Barry's Wars and massive military buildups Now with some military wind down there is less spending in SA area and stall in new home sales. Hospital construction has also slowed in both these areas where it was very brisk before.


We'll see how the summer goes.

nightshiftsucks's picture

I live in the SF east bay area,looks like housing is slowing here also.I'm thinking the Chinese are pulling back because of whats going on in their country.if they start selling it's game over.

cobra1650's picture

Very fecal article...will take Gundlach over Joe Carnival Bark Lasagna any day

Market Analyst's picture

Yeah Jeffrey Gundlach is in for a big smackdown for the next five years, more outflows coming out of bond funds as central banks exit these markets.

philipat's picture

Predicated on US growth? What US growth? I think he will be correct.....And if there is a long-overdue Equity crash, he will be very correct.

madbraz's picture

At least he sits on a throne, unlike the turd who writes these articles - fetid him who inhabits toilets.