Only a few months have passed since the “Bond King” Jeffrey Gundlach warned about the possibility of the next great recession originating from the bond market. Although the world renowned expert did hedge by also saying that it was more than likely to occur years down the road. In the last few days he has reinforced his position that there is no way it will happen during the current year.
Four times every year Gundlach analyzes the markets on his free podcast; the most recent one was held on Tuesday (June 9th, 2015), when he talked about the junk bond market. But that wasn’t the only interesting topic. Let’s take a look at what else the Bond King highlighted!
Will there be an interest rate hike this year?
On the basis of the American bond market, we can determine when the experts expect the Fed to begin raising interest rates. We can clearly see that the chances of a rate hike happening in June are close to nil, and that the market had already priced this in at the end of April. According to Gundach, what is of greater interest is that the chances of a rate hike in September have somewhat increased recently. He, however, already believes that the chances of a December increase are less than 50%. (This is in line with both the IMF and World Bank, which have recommended that the Fed hold off with any rate increase until 2016.)
Gundlach acknowledged that one of the most important graphs of his presentation was that of the US’s average hourly earnings and the Fed Funds Target. He emphasized that although it was difficult to notice, wages had recently shown a rising trend, warning that if the trend strengthened, it would be at that point when the Fed really would have to ponder the rate hike.
He also brought up his oft-mentioned belief that the Fed wanted, in any event, to raise rates because its basic goal was to be above 0% by the time the economy again started to weaken.
A few words about the dollar…
According to the Bond King, we are in the middle of a multiyear bull market for the dollar. Gundlach has been saying this since 2011, and even though he sees the dollar continuing the sideways trend begun in March, in the long run we will be dealing with a strong dollar for years to come.
How he sees the bond market
Apropos of forecasting reliability, Gundlach presented a graph of US 10-yr treasury performance, overlaying actual yields with analysts’ quarterly consensus forecasts. It was clear that despite the real curve’s actual performance, in every case the analysts expected similar yield increases in the past and even into the present. It thus should come as no surprise that Gundlach’s opinion veers away from the consensus. He believes that the bond market will close the year where it had started it.
Concerning the long-term bond market, he also said that based on the past eighteen months’ performance, it is clear that investors are waiting for the Fed to raise rates. Nothing else can explain the behavior of long-term yields. He believes that when the interest rate hike cycle finally begins, everyone should liquidate his junk bond holdings and buy US treasuries instead. At the same time, in the short term he is not worried at all about the junk bond market. There is no reason to panic for the remainder of the year, for the simple reason that very few junk bonds will be expiring in the remainder of the year.
He believes it is not a problem to continue “dancing with junk bonds”, but that “it doesn’t hurt to stay close to the exits”.
All of the slides shown in Jeffrey Gundlach’s presentation may be seen here.
The original date of Hungarian publication: June 12th, 2015