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Gundlach Sounds Fed Alarm, Warns of Selloff Near Inauguration Day

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In a webcast presentation Tuesday to investors, DoubleLine Capital head Jeffrey Gundlach said a 3% rise in 10-Year Treasury yields next year could be very negative for equities and other investments.

“We’re getting to the point where further rises in Treasuries, certainly above 3%, would start to have a real impact on market liquidity in corporate bonds and junk bonds,” he explained. “Also, a 10-year Treasury above 3% in my view starts to bring into question some of the aspects of the stock market and of the housing market in particular.”

The Federal Reserve made a 0.25% hike in the federal funds rate on Wednesday. Before the news, the 10-year yield traded near 2.48% and moved to 2.49% afterward. Gundlach also cautioned investors to “watch out for a broad sell-off near inauguration day.” 

A chart he discussed shows that, since 1952, changes in political parties coincided with a slight drop-off on inauguration day and  larger decline afterward.

Trump Troubles

Though the S&P 500 Index is up about 6.5% since the election, Gundlach said there could be a reversal in this solid momentum by or around Jan. 20. He also sees the U.S. dollar poised to weaken in the near term given that “bullishness in the dollar is pretty entrenched.”

The fixed income specialist highlighted a quote from President-elect Donald Trump: “I love the concept of a strong dollar …,” he said on CNBC. “But when you look at the havoc that a strong dollar causes … it sounds better to have a strong dollar than it actually is.”

Trump has proposed infrastructure spending and related fiscal policies that could encourage more fixed income sales and push yields higher; higher yields may also entice some investors to get out of certain equities, Gundlach said.

Commenting on trends in government spending over the next four years, he referred to a chart that showed U.S. defense spending as a percentage of GDP: “Clearly, under a Trump administration, this blue area is going to be moving up,” Gundlach said.

Debt Drag

Such aggressive spending, which Trump campaigned on, Gundlach said, could “lead to another leg up on debt, which is not friendly for bonds.”

While the debt-to-GDP ratio was 31% in 1982, it now stands at 105%. “People have fallen asleep on this topic since 2011,” said the bond guru.

“There is a lot of debt in the economy, and it will be hard to get a debt-based boom,” he added.

Given the “bond unfriendly” nature of the incoming administration, Gundlach looks out four to five years and says investors should get ready for a 6% yield on 10-year Treasuries.

During Tuesday’s call, he also said he had increased the average duration of holdings in the DoubleLine Total Return Bond Fund. However, he also holds debt at a shorter duration than the Barclays U.S. Aggregate bond index.

Speaking with Reuters on Tuesday, Gundlach said: “I think above 3% is a problem. If the 10-year goes above 3%, you would also have to say unequivocally you have seen the end of the bond bull market.”

As for buying and selling, he believes that it is OK to purchase some bonds today. “We hate the market less. We are a little bit less defensive,” Gundlach said. (In other words, when bond prices weaken, DoubleLine is more likely to buy them.)

Referring to a jump to 3% in the 10-year Treasury, high-yield “junk” bonds will drop into a “black hole of illiquidity,” Gundlach said. 

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