Gundlach says brace for stock-market upset if 10-year yields top 3%
Washington (Dec 14) Stock investors have largely ignored the recent carnage in the bond market, but they could face a rude awakening next year when Donald Trump takes over the U.S. presidency, warns bond guru Jeffrey Gundlach.
In a webcast presentation on Tuesday, the DoubleLine Capital chief executive said 10-year U.S. yields TMUBMUSD10Y, -1.73% could jump to 3% next year as inflation rates and government debt start to rise under a Trump administration.
“We’re getting to the point where further rises in Treasurys, certainly above 3%, would start to have a real impact on market liquidity in corporate bonds and junk bonds,” he said in the presentation, according to Bloomberg.
“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,” he added.
But the 3% is likely only the beginning. As the “bond unfriendly” Trump administration takes over, the 10-year yield could surge to 6% within four to five years, Gundlach said, according to Reuters.
Interest rates have already climbed rapidly in the second half of 2016, with the 10-year yield rising more than 100 basis points since July, as shown in this chart below. Interest rates rise as bond prices fall.
The rally in yields has come on increased expectations that Trump’s pledge to go on a fiscal- spending spree will boost economic growth, the U.S. deficit and inflation. Those factors are seen as pushing the Federal Reserve to raise interest rates more aggressively than previously believed and, in turn, push up yields on U.S. Treasurys.
Read: Look for the Fed to hike interest rates this week and to ignore the elephant in the room
The Fed will release its latest policy decision on Wednesday at 2 p.m. Eastern Time, and is widely forecast to raise rates by 25 basis points. Fed Chairwoman Janet Yellen’s press conference at 2:30 p.m. will be closely watched for signs of the path for interest rates in coming years.
Mohamed El-Erian, chief economic adviser at Allianz ALV, -0.92% and the current chair of President Barack Obama’s Global Development Council, told CNBC on Wednesday he expects the Fed to signal at least two rate increases next year. Among other economists, Goldman Sachs GS, +0.28% forecasts three hikes next year, while Morgan Stanley MS, +0.75% predicts two increases in 2017.
The recent jump in bond yields have coincided with a rally in stock markets that has propelled the Dow Jones Industrial Average DJIA, -0.03% to an all-time high and close to the 20,000 level. This chart explains why stock investors are largely are ignoring the selloff in the bond market.
Source: MarketWatch
