An earlier version of this article incorrectly said DoubleLine Capital’s Jeff Gundlach forecast that yields on the 10-year Treasury note will reach 3%. Gundlach said the market would be hurt if yields reach or exceed 3%.
Source: http://www.marketwatch.com/story/gundlach-brace-for-stock-market-upset-if-10-year-yields-top-3-2016-12-14
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| Jeffrey Gundlach, founder and chief executive officer of DoubleLine Capital. |
Wall Street investors have largely ignored the recent carnage in the bond market, but they could face a rude awakening next year when Donald Trump takes over the U.S. presidency, warns bond guru Jeffrey Gundlach.
In a webcast presentation on Tuesday, the DoubleLine Capital chief executive said if yields on the 10-year U.S.Treasury note TMUBMUSD10Y, +0.00% jump to 3% or higher , as inflation rates and government debt start to rise under a Trump administration, equity and fixed-income markets could be hurt.
“We’re getting to the point where further rises in Treasurys, certainly above 3%, would start to have a real impact on market liquidity in corporate bonds and junk bonds,” he said in the presentation, according to Bloomberg.
“Also, a 10-year Treasury above 3% in my view starts to bring into question some of the aspects of the stock market and of the housing market in particular,” he added.
As the “bond unfriendly” Trump administration takes over, the 10-year yield could surge to 6% within four to five years, Gundlach said, according to Reuters.
Interest rates have already climbed rapidly in the second half of 2016, with the 10-year yield rising more than 100 basis points since July, as shown in this chart below. Interest rates rise as bond prices fall.
The rally in yields has come on increased expectations that Trump’s pledge to go on a fiscal- spending spree will boost economic growth, the U.S. deficit and inflation. Those factors are seen as pushing the Federal Reserve to raise interest rates more aggressively than previously believed and, in turn, push up yields on U.S. Treasurys.
Indeed, the Fed in its latest policy decision raised rates by 25 basis points and forecast three hikes in 2017 compared with two in an earlier outlook for rate increases.
Goldman Sachs GS, +0.58% forecasts three hikes next year, while Morgan StanleyMS, +0.70% predicted two increases in 2017.
The recent jump in bond yields have coincided with a rally in stock markets that has propelled the Dow Jones Industrial Average DJIA, -0.60% to an all-time high and close to the 20,000 level. This chart explains why stock investors are largely are ignoring the selloff in the bond market.
Source: http://www.marketwatch.com/story/gundlach-brace-for-stock-market-upset-if-10-year-yields-top-3-2016-12-14