Jeffrey Gundlach, chief executive officer of DoubleLine Capital, sees a rise in bond yields that could lift the yield on the 10-year Treasury note to 6% in the next four or five years.
Trump’s pro-business agenda is “unfriendly” to bonds, Gundlach says, as it could to lead to stronger economic growth and renewed inflation. Gundlach expects President-elect Trump to “amp up the deficit” to pay for infrastructure projects and other programs.
That could produce an inflation rate of 3% and nominal growth of 4% to 6% in gross domestic product, said Gundlach, who oversees more than $106 billion in assets at Los Angeles-based DoubleLine.
“If nominal GDP pushes toward 4%, 5%, or even 6%, there is no way you are going to get bond yields to stay below 2%,” he told Barron’s.
The yield on the benchmark 10-year Treasury bond rose 0.27 percentage point in the two trading days following the election, to end the week at 2.15%.
Gundlach won’t rule out “a tradable rally in the bond market before year end.” But the longer-term trend likely is higher. “The idea that inflation and interest rates can never go up is a very tired narrative, born of years of stability in both,” he said. “If rates stay around these levels, it is probably a net positive for stocks,” he says. “But if they move sharply higher, I don’t see how stocks withstand it,” he said.
He said while Trump’s policies could boost the economy at the start, a potentially “unacceptable” level of debt to GDP could trigger pain in the future.
“With rising interest rates and rising debt levels, we are going to have to make some tough decisions,” he says. “What are we going to do in terms of collecting taxes and distributing government revenue? What will we do about Social Security, Medicaid, Medicare? That is what the 2020 election will be about.”
(Newsmax wire services contributed to this report).
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