Gundlach: Treasury Market's 'Flight to Quality' Has Room to Run

Sunday, 17 Aug 2014 09:03 PM

By Dan Weil

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The 10-year Treasury note's yield fell to a 13-month low Friday amid concern of intensified conflict in Ukraine, and it may keep dropping, says star bond fund manager Jeff Gundlach, CEO of DoubleLine Capital.

The 10-year yield hit 2.3 percent Friday after news that Ukraine forces attacked Russian military vehicles. Investors sought Treasurys as a safe haven.

The yield stood at 2.35 percent Friday afternoon. But if it can sustain a move below that level, "I think we're going to 2.2 percent," Gundlach told CNBC.

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"At this point it's a momentum trade. People are looking for safety, and obviously the Treasury bond market looks attractive versus other bond markets."

While there has been some speculation that the Federal Reserve may raise interest rates by early next year, Gundlach thinks that forecast is jumping the gun.

"The action of the bond market is not suggesting interest rate increases at all, and the Fed usually follows the long end of the bond market," he said.

His view is backed up by the retail sector's weakness. Retail sales were unchanged in July, and many retailers have complained that the industry is in a funk. That's a problem for the economy, given that consumers account for about 70 percent of GDP.

Others echo at least some of Gundlach's points.

"This is just the never-ending flight-to-quality bid," David Coard, head of fixed-income trading at Williams Capital Group, told Bloomberg, explaining the Treasurys rally.

"Things are heating up in the Ukraine, and the bid for Treasurys is heating up along with it. The economic data recently has been a little underwhelming."

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