As we head into another year most bond market experts are expecting U.S. interest rates to rise, bringing to an end three decades of falling rates.
But Jeff Gundlach is not like most bond market experts. Exactly one year ago, Gundlach, the head of DoubleLine Funds, correctly predicted rates would fall in 2014.
And he’s started 2015 in much the same way, In an interview with Barron’s over the weekend, Gundlach is once again taking a contrarian view, saying rates could go lower than we’ve seen in a very long time:
Where the median economic forecast tabulated by Bloomberg for the 10-year U.S. Treasury Bond yield for year-end 2015 currently stands at 3.24%, Gundlach thinks the 10-year that finished 2014 at 2.17% could potentially take out its modern-era low of 1.38% yield hit in 2012. This would particularly be the case if crude-oil prices keep falling to, say, $40 a barrel from their 2014 year-end level of about $55. This further drop from the 46% decline suffered by crude in 2014 would only accentuate deflationary forces he sees at work globally that continue to drop long-bond yields…
…weighing on U.S. bond yields will be brisk foreign buying from investors in Japan and Europe, where long-term sovereign debt bond yields are mostly lower than U.S. rates and economic growth prospects are less bright. “Everybody worried about what would happen to the U.S. government [bond] market when the Fed ended [its third round of quantitative easing] last fall and stopped its heavy monthly government bond purchases,” he points out. “The answer, of course, is that foreign buying easily replaced declining government support of the market. And the strengthening dollar, which we think will continue, only makes U.S. bonds all the more attractive, for not only do foreign investors benefit from higher relative rates, but they also win on currency translation profits.”
You can view the full interview with Barron’s here. (Subscription required)
Todays Other Top Stories
Learn Bonds: – Top 5 concerns for investors in 2015. – Bond market doomsayers arguments are not without merit, but that doesn’t mean their predictions will come true. So here are the top five concerns that they think investors are facing in 2015, and my thoughts on what to do about those concerns.
Barron’s: – Jeffrey Gundlach’s surprising forecast. – It has been a magnificent year for both the stock and bond markets, even with the slight wobble in equity-market results in the last two trading sessions of 2014. But with the drop of the ball on the Year of the Horse, it’s time to look ahead to 2015.
Think Advisor: – Why Wall Street (still) hates bonds. – Now that Wall Street’s prediction of a Great Bond Market Crash in 2014 has utterly failed (along with similar predictions over the past five years), we’re still left with one big question: How long will it take for U.S. bond yields to finally hit rock bottom?
US News: – 5 bond myths investors should know. – Did you know that a bond fund does not afford the same opportunities for tax customization as holding individual bonds?
Bloomberg: – Bond market waiting for Godot in credible contrarian narrative. – Most Wall Street analysts predicted a bear market for bonds in 2014 and got it wrong. Who’s to say they’ll get it right this year?
Barron’s: – Muni Bonds: Calm ahead for 2015? – At times over the past few years, municipal bonds seemed to stray from their traditional role as staid income generators and morph into momentum investments, with performance driven by herds of investors alternately piling into munis or abandoning them, based on a variety of largely external forces.
Truth Out: – Behind New Jersey’s tobacco bond bailout, a hedge fund’s $100 million payday. – Trenton, New Jersey – When state Treasurer Andrew Sidamon-Eristoff briefed lawmakers on New Jersey’s ailing budget in April, he brought good news. His office had just raised a welcome $92 million thanks to a deal that bailed out two bond issues headed for default.
Bloomberg: – Municipal bond maturities to decline 38% after market contracts. – State and local government costs to repay maturing debt will fall 38 percent in 2015 after a year when the municipal bond market contracted.
Reuters: – Long bond yields hit multiyear lows on safety buying. – U.S. Treasuries prices gained on Monday, led by a sharp rise in the 30-year bond, whose yield dipped to a multiyear low on widening anxieties about Europe’s economy and Greece possibly quitting the euro zone.
Investment Grade Bonds
Bloomberg: – U.S. company-bond market set for flurry of sales. – The lull in the U.S. corporate-bond market is poised to end as companies return to finance acquisitions and roll over maturing debt amid forecasts for rising interest rates.
High Yield Bonds
Investopedia: – Is the JNK ETF a good investment? – If you’re thinking about investing in (or trading) SPDR Barclays High Yield Bond ETF (JNK), then there are several things you need to know about the high-yield bond market.
Forbes: – How a comic book nerd became bond buyers’ best friend. – Attorney Adam Cohen, founder of fixed-income research firm Covenant Review, has mixed feelings about the year. On the one hand, the need for his business has never been greater, as offering statements and indentures flood his in-box. But on the other hand, institutional investors are so hungry for high coupons that they are willing to lend money despite what appear to be glaring omissions and provisions that could put them at risk in the future.
Barron’s: – Closed-end emerging-market bond funds are cheap. – (Subscription) Emerging markets securities are on sale, none more so than a handful of closed-end bond funds.
Morningstar: – What should investors learn from Russia? – Years of weak growth in Russia’s oil-dominated economy left it particularly vulnerable to sanctions announced earlier this year. But the key destabilising event in 2014 was the rapid fall of the price of oil, which had a negative impact on Russia’s fiscal budget and trade balance, as well as the value of the rouble.
Business Insurance: – Record property/casualty catastrophe bond year may signal future growth. – Record issuance of property/casualty catastrophe bonds in 2014 has put players and observers in a bullish mood about the alternative risk transfer market’s prospects for 2015 and beyond.
Barron’s: – Best income ideas for 2015. – (Subscription) Income investors feasted in 2014. This year, the menu is decidedly less attractive, but not unpalatable. Our search for attractive income investments turned up issues that pay 3% all the way up to nearly 10%, and many that could rise in value in coming quarters, while much of the income universe falls.
Morningstar: – Tactics for combating low bond yields. – Dividend-paying stocks and preferreds, lower-quality bonds, and stable-value funds top readers’ lists of investments for a yield-starved environment.
Dividend Investor: – 2015 fixed income yield comparison and recommendations. – As 2015 begins, investors will still have a hard time getting good quality, higher yielding investments. If you don’t like volatility, stick with CDs in a bank, as 2015 should have plenty of it.
US News: – 4 bond investing strategies to prepare for rising rates. – You can’t know exactly when interest rates will rise, but these strategies will help you formulate a plan.
Reuters: – DoubleLine posts $2.2 bln in net inflows in December. – Jeffrey Gundlach’s DoubleLine Funds, an investment firm that has been a major rival of bond fund Pimco, reported an 11th consecutive month of net inflows in December, totaling $2.23 billion.
Bloomberg: – Pimco Total Return Fund had withdrawals of $19.4 billion in December, the 20th straight month of redemptions. – Pacific Investment Management Co.’s biggest mutual fund suffered about $19.4 billion in withdrawals in December, the 20th straight month of redemptions, capping a year that included the surprise departures of Bill Gross and Mohamed El-Erian.
WSJ: – Will funds outperform in 2015? – (Subscription) As 2015 gets under way, most on Wall Street expect the nearly six-year-old bull market for stocks to keep running. And the long-awaited bear market for bonds seems to be on hold.
Curve flatter again today- 2s30s down to 200bps… Started 2014 at about 360bps
— David Schawel (@DavidSchawel) January 5, 2015
2014 US mutual fund flow data (vs 2013): Investment Grade $73bn ($52bn), High Yield -$6bn (-$19bn), EMD $0.7bn ($0.9bn). AMG excludes ETFs.
— Bond Vigilantes (@bondvigilantes) January 5, 2015
The muni market’s nuances may present investment opportunities: A comparison of duration-equivalent portfolios pic.twitter.com/ZolT5OBEhf
— Nick (@NickatFP) January 5, 2015
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