Jeffrey Gundlach, the CEO and chief investment officer of Doubleline, has a message for all those advisors and investors who think the Federal Reserve will raise rates in December: Take more interest rate risk and less credit risk. Buy long-term Treasuries, and sell high-yield bonds.
It’s a money-making strategy when the Fed does raise rates, according to Gundlach, who was featured in a webinar, “The Road Ahead: What’s Next for Fixed Income,” on Tuesday, along with James Ross, global head of SPDR Exchange Traded Funds.
Gundlach recalled that beginning in 2013, confidence was growing that the Fed would hike rates, but despite that, long-term Treasury yields fell throughout 2014. Thirty-year Treasury bond yields plummeted, ending 2014 at 2.70%, down from 3.93% at the beginning of the year. By year-end the 30-year Treasury bond had gained almost three times more than the S&P 500: up 30% compared with 11.4%. Ten-year Treasury yields also fell sharply to 2.21%, down from 3%.
“The long bond wants the Fed to tighten,” Gundlach said.
Gundlach said that he was buying the 10-year Treasury note earlier this year for the SPDR DoubleLine Total Return Tactical ETF (TOTL) and Total Return mutual fund (DBLTX) when Treasury yields his yields rose above 2.25% from around 1.65% in January, then stopped when yields fell back to 2%. The 10-year Treasury yielded 2.21% at Monday’s close. Gundlach doesn’t expect the Fed will raise rates this year.
The market is split. Traders are now pricing in a 49% probability of a Fed rate hike at the central bank’s December policymaking meeting (there’s a meeting also in October), down from 64% just before the Fed’s most recent two-day meeting, which ended last Thursday, according to Bloomberg.
Gundlach says the market is more confused now about Fed policy than it was before last week’s meeting.