DoubleLine Capital CEO Jeffrey Gundlach is advocating a conservative approach in the bond market, especially as the Federal Reserve grapples with its next policy moves. Following the Fed's decision on Wednesday to maintain the federal funds rate within the 3.5% to 3.75% range, three policymakers dissented, favoring a quarter-point rate increase.
Gundlach expressed his view that if Chairman Kevin Warsh aims to achieve the Fed’s 2% inflation target, significant rate hikes will be necessary. He suggested to CNBC's "Closing Bell" that reaching this inflation goal could span "a couple of years."
In this uncertain economic climate, Gundlach emphasized a highly selective investment strategy. He noted a clear softening within the corporate credit market, particularly observing "great movements wider in spreads for a lot of these AI names and other technology names," though less so in the investment-grade sector or universally across all industries. His focus remains squarely on high-quality assets, specifically bonds rated BBB or higher.
While he might consider adding some BB-rated assets within the high-yield market, Gundlach issued a strong warning against the C category. He urged investors to "seriously thinking about what is the credit risk, what is the default risk in the triple C part of the junk bond market and the bank loan market." He highlighted the notable widening of spreads for CCC-rated names compared to BB names in bank loans, interpreting this as a potential red flag signaling underlying issues.
Regarding the yield curve, Gundlach is avoiding the long-end, preferring to concentrate investments in the two- to seven-year maturity range. Post-Fed meeting, the 30-year Treasury yield surged past 5.2%, a level not witnessed since 2007. Gundlach anticipates the long-end rate could climb into the "mid-5s" before the Fed's upcoming September news conference. Bond yields and prices, it's worth noting, move in opposite directions.
He attributes the ascent in long-term rates to several factors: escalating government debt, shortfalls in the Social Security trust fund, and the "monstrous deals" emanating from artificial intelligence companies. Gundlach concluded that "Interest rates are going to keep rising unless there is action on the deficit and some movement towards a real decline in the inflation rate."
