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The answer to "What's going to give the Fear Index a boost ?" was staring us in the face all along .... The threat of Thermonuclear War,...

August 11, 2017

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If you run $105 billion, your views tend to get noticed ...... ref :- "Gundlach Says Bond Rally to Continue With 10-Year Yield Falling" , Bloomberg Markets

April 5, 2017

 

If you run $105 billion, your views tend to get noticed ......

 

ref :- "Gundlach Says Bond Rally to Continue With 10-Year Yield Falling" , Bloomberg Markets

 

Just because you're known as one of the bond gurus and control an awful lot of money, that doesn't always make you right. At the start of the year, there was a high-profile difference of opinion between the guru in question, Jeffrey Gundlach of DoubleLine Capital, and another of the species Bill Gross of Janus Capital. They disagreed on what yield level on the US 10yr Treasury would signal an end to the long-term bull-run in the bond market. They went for 3.00% and 2.60% respectively, and the only thing we could be sure of was that they couldn't both be right.

 

** NOTE : Actually, the 10yr yield did climb above 2.60% a few times in the second week in March, but followers of Mr Gross might argue that the break of the key level was never convincing enough to draw any conclusions.

 

Anyway, Mr Gundlach's most recent prognostication before yesterday proved to be on the mark. Ahead of the March 15th interest rate decision by the Fed, he predicted that the widely expected rate hike would in fact prompt a bond market rally  --  which is to say yields down, prices up of course, and from a distance a counter-intuitive reaction to a rate increase. With the 10yr yield now at 2.36%, he was right  --  though some might have different interpretations of the rationale behind the move. Essentially his argument centered around the fact that the inflation concerns brought on by Mr Trump's plans to reflate the economy will be countered by the steep path of rate increases to be embraced by the Fed.

 

Everyone would agree that whilst the initial move had a large element of the "Sell on rumour, Buy on fact" about it, there has definitely been a softening of those worries about inflation. Some would say however that this has less to do any aggressive stance on monetary policy adopted by the Fed  --  in fact, the central bank has been re-emphasising its gradualist approach to rate hikes  --  and more to do with a reassessment of how much of the president's reflationary agenda he can convert to reality. The infrastructure spending plans may be largely achievable (whatever they turn out to be) , but after the failure to get the healthcare bill through Congress it looks like it's going to be really tough to get the president's tax cuts approved, at least in anything like the form he intended.

 

Nobody needs to tell Mr Gundlach , of all people, about the inflationary implications of Mr Trump's likely tax plans. He has been "up front and centre" in signposting them since election time. For sure, the diminishing prospect of those plans getting through Congress intact will have played a part in Mr Gundlach's latest call. The rally will continue for a while yet in the bond market, especially at the longer end. Yields on 10 yr Treasuries will go below 2.25% at a minimum, and possibly below 2.00% before any move back up.

 

Longer-term, Mr Gundlach remains a bond market bear  --  yields up , prices down  --  but if a 3.00% 10yr yield by the end of the year is still a possibility, it's considerably less likely than it was. It'll come though  --  eventually  --  and to go back to where we started, 3.00% is where Mr Grundlach believes the bear market really begins.

 

It's just one person's view ....... but it just so happens that this particular person is Jeffrey Gundlach.

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