Bond Market King Jeffrey Gundlach: Don’t Listen To Federal Reserve On Interest Rates, Listen to Bond Market

Bond Market King Jeffrey Gundlach: Don’t Listen To Federal Reserve On Interest Rates, Listen to Bond Market


DoubleLine Capital CEO Jeffrey Gundlach on "Wall Street Week," Fox Business, New York, May 5, 2016. (AP Photo/Richard Drew)

Jeffrey “Bond Market King” Gundlach made the case for bonds, saying “investors should look at what the market says over what the Fed says” when it comes to trying to figure out what interest rates will do.

The billionaire CEO of DoubleLine Capital, fixed-income manager Gundlach told listeners on a webcast Tuesday that he was drawing on his 40+ years of experience in finance in making this recommendation.

Several Federal Reserve officials including Atlanta Fed President Raphael Bostic have suggested that they expect their policy target to rise from the current 4.25-to-4.5 percent to more than 5 percent and stay there for some time.

Markets appear much more skeptical, Bloomberg reported. Swaps are currently pricing in a peak of less than 5 percent and suggest that policymakers will instead begin cutting before the end of 2023 as a U.S. recession looms.

Treasury yields have fallen after recent data showed a moderation in U.S. wage gains and a contraction in the services sector. 

From a macro perspective, the yield curve is “screaming recession” because of the Fed’s aggressive actions in the second half of 2022, Gundlach told market watchers.

An inverted yield curve, which graphically shows that long-term interest rates are less than short-term interest rates, has proven in the past to be a reliable indicator of a recession.

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“The 3-month to the 10-year became inverted not long ago. The 10-year yielded more than 200 basis points than the three-month bill,” Gundlach said. “We see that we have exactly the setup that goes all the way back to the Volcker days. We haven’t seen the 3-10s this inverted since the early 1980s. It was close in 1999-2000. But that was a pretty nasty recession that ensued. And it occurred in the aftermath of a very overvalued stock market. And I talked about the S&P 500 being very overvalued last year.”

And that’s just one of many signs pointing to a coming recession in 2023, Kitco News reported. Others include a big drop in the consumer savings rate, an uptick in consumer credit card use, the Leading Economic Index (LEI) and the recent ISM PMI data.

In 2023, Gundlach said he sees a lot of opportunity in bonds, with the bond market now looking much cheaper than the stock market. “The bond market is demonstrably cheap to the stock market, and I recommend not a 60-40 portfolio, but more like a 40-60 portfolio or even a 40-25-15 portfolio, with bonds, stocks, and other things,” he said. “Bond allocation will prove much more rewarding this year.”

The Fed will have trouble getting rates up to 5 percent and will be forced to cut rates in 2023r, Gundlach predicted, based on what he said the bond market is signaling. “The bond market pricing shows that the Fed is not going to make it to 5 percent. They’re going to make it just under 5 percent by May or June and then start cutting. And by the end of 2023, the Fed funds rate is predicted by the bond market to be lower than it is today,” he said.

In its latest forecast, the central bank projected that the Fed Funds Rate would increase to at least 5 percent and that there would be no rate cuts in 2023 but the markets have been pricing in cuts starting in the second half of the year.

Minneapolis Federal Reserve President Neel Kashkari told the New York Times, “I’ve spent enough time around Wall Street to know that they are culturally, institutionally, optimistic … They are going to lose the game of chicken, I can tell you that.”