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December 14, 2016 at 09:30 AM
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
