DoubleLine Capital founder Jeffrey Gundlach believes that long-term Treasury yields are apt to jump over the next few months as the Federal Reserve works to fuel inflation higher.
“I can’t emphasize enough that October statement by Powell, where he said ‘We’re not even considering raising interest rates unless we see a substantial and persistent rise in inflation,'” Gundlach told CNBC’s Scott Wapner.
‘”When you hear that, that the Fed is cheerleading inflation higher … what that says is that the path of least resistance for the 10-year is higher until such time as the Fed manipulates it lower.”
Asked how high the rate on the benchmark 10-year Treasury note could climb amid rising prices, Gundlach said that key technical resistance around 2.05% could offer the note’s first barrier to further devaluation. Bond prices fall as yields rise.
Key to the DoubleLine thesis is his expectations that consumer prices will march higher on the heels of key government inflation data.
The Labor Department reported Wednesday that consumer prices rose slightly more than expected in November as fuel and housing costs pushed up how much everyday Americans spend. The government’s headline consumer price index rose 0.3% in November from the prior month, just above what economists polled by Dow Jones had expected.
Core CPI rose 0.2% as expected and has risen 2.3% from a year earlier for two consecutive months.
But Gundlach said his firm’s model shows consumer prices rising to 2.5% on an annualized basis within the next few months. He also warned that any signs of economic weakness could spark a rally in rates akin to the “Taper Tantrum” of 2013.
“We had a 150-basis-point rise in the 10-year in six weeks. That’s simply because Ben Benanke said ‘We thinking about tapering our quantitative easing,'” Gundlach said.
“I think if we get economic weakness along the way, which I’m not expecting in the near term, you could see a move back up to 3.25% on the 10-year,” he added. “I think that would get the Fed back into quantitative easing.”
His comments come after he said Tuesday that long-term rates are heading higher, adding that President Donald Trump being reelected is part of base-case scenario for 2020.