Bond yield has recovered quite a bit in the last month. Now a famous bond investor is saying it’s about to rise further.
During a webcast on Thursday, September 8, DoubleLine Capital’s Chief Investment Officer Jeffrey Gundlach said that interest rates have likely bottomed. He also indicated that investors should be positioned defensively. (Source: “Gundlach Says It’s Time to Get Defensive as Rates May Rise,” Bloomberg, September 8, 2016.)
“This is a big, big moment,” he said. “Interest rates have bottomed. They may not rise in the near term as I’ve talked about for years. But I think it’s the beginning of something and you’re supposed to be defensive.” (Source: Ibid.)
Gundlach pointed out that the low yield on the benchmark 10-year U.S. Treasury note in July did not last long, which could be a sign that interest rates have hit bottom. The legendary investor predicts that the yield on 10-year U.S. Treasuries could rise above two percent by the end of this year.
According to Gundlach, one of the reasons why interest rates would rise in the future is fiscal stimulus. He said that both parties’ presidential candidates have advocated more spending on infrastructure. To fund that spending, the government could issue more bonds. And a surge in the supply of bonds means investors could demand higher yields.
“People say, ‘How can rates rise?’” Gundlach said. “That’s how they can rise and they’re sort of rising already.”
One way for fixed-income investors to protect themselves is to reduce the duration of their positions. Gundlach himself has shortened the effective duration on his firm’s Total Return Bond Fund and reduced its exposure to high-yield bonds. Most of the fund’s assets are now invested in mortgage-backed securities.
U.S. government bonds tumbled on Friday. Yields on most Treasuries went up, with the benchmark 10-year note yielding 1.675%.