From Barron's Up and Down Wall Street column:
The bond titan thinks the 10-year could potentially take out its modern-era low of 1.38%
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.Jeffrey Gundlach's Surprising Forecast
And we could think of no one better to talk to than the widely acclaimed King of Bonds, Jeffrey Gundlach, who presides over the $64 billion asset-management complex DoubleLine. He is never shy in offering his opinion on all manner of securities in the U.S. and around the world.
During an interview on the second-to-last trading day of 2014, we found him in a relaxed, expansive mood. And why not? His funds had a banner year, with his flagship DoubleLine Total Return Bond fund (ticker: DBLTX), with $40 billion in assets, and DoubleLine Core Fixed Income fund (DBLFX), with $3.4 billion, finishing in the top decile of their Morningstar groups. Likewise, the DoubleLine Emerging Markets Fixed Income fund (DBLEX) ended in the 96th percentile of its Morningstar class. Meantime, some $4 billion in the DoubleLine go-anywhere hedge fund complex scored a better than 20% annual return, say investors.
It was a much happier new year for DoubleLine and Gundlach than it was for giant rival, Pacific Investment Management Co., and its now-departed chief Bill Gross. Outflows from Pimco’s flagship Total Return fund (PTTRX) rose to $19.4 billion in December. In the midst of Gross’ messy departure from the firm, he met for three hours with Gundlach about the possibility of teaming up. Gross landed at Janus Capital, but Gundlach evinces much respect for his sterling record over more than 40 years of running bond money. “He navigated Total Return magnificently during the 2008 credit crisis, for example,” Gundlach opines.
Per usual, Gundlach has an idiosyncratic view of where markets are headed in 2015. Like virtually everyone, he expects the Federal Reserve to begin raising the federal-funds rate this year, but he predicts that the impact will be the opposite of the conventional wisdom. To wit, longer-term bond yields will, in fact, decline rather than rise as a result of a surprising flattening of the yield curve, he argues.
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.
Gundlach says he’s constantly asked “how low oil prices can go,” and he responds that no one will know until they stop falling. “That answer isn’t meant to be cute,” he says. “When you have a market that showed extraordinary stability for five years -- trading consistently at $90 [a barrel] or above -- undergo a catastrophic crash like this one, prices usually go down a lot harder and stay down a lot longer than people think is possible.”...MUCH MORE
