‘Bond God’ Gundlach: The 30-year bull market in bonds will end this year

From Justin Brill, Editor, Stansberry Digest:

Regular Digest readers know Gundlach, the CEO of investment firm DoubleLine Capital, called the top in U.S. Treasury bonds – and the bottom in long-term interest rates – last summer when virtually everyone was bullish on bonds, and thought rates could only go lower. As we noted in the July 13 Digest

Gundlach doesn’t just believe bonds are forming a near-term top… He thinks the entire, decades-long bull market in bond prices is ending. And while he doesn’t think yields will soar higher immediately, he doesn’t believe rates will go much lower.

He agrees that sentiment has become extreme. He says he has fielded more investor questions about buying Treasurys recently than at any other point in his career. He also noted that no one he talks to thinks interest rates can go higher today… and said it’s often when most people say something “can’t happen” that it’s most likely to occur.

Of course, we know now he was exactly right… Long-term rates – as tracked by the yield on the benchmark 10-year Treasury note – bottomed at 1.35% in early July and soared to more than 2.55% by year-end. Since then, rates have been trading in a relatively tight range…

But Gundlach believes the next big move in rates is approaching…

During his latest monthly investor webcast, Gundlach said that we could see another temporary drop in rates in the near term. But he expects rates to resume their rise to 3% or more this year.

He also repeated his call that this level will officially mark the end of the 30-year bond bull market… and again predicted that rates would rise above 6% before the end of Trump’s first term.

Gundlach also noted that stocks aren’t cheap, but said rising “inflationary pressures” and improving business confidence mean stocks are likely to “grind higher” a while longer. But he warned rising long-term rates could eventually begin to weigh on the market…

“We all know that the stock market has some momentum behind it and there’s some animal spirits behind it,” he said. “But I do think it will succumb to higher Treasury yields should they begin to occur in the middle of the year as we expect.”

Gundlach also thinks rising inflation and long-term rates could push the Fed to pick up the pace of future rate hikes…

And he noted history suggests that once the Fed starts a tightening cycle, it often doesn’t stop “until something breaks.”

He has a point… As you can see in the following graphic, courtesy of Bank of America Merrill Lynch Chief Investment Strategist Michael Hartnett, recent rate-hike cycles have ended with a financial “event” of some sort or another…

Worse, these “events” have been occurring at lower and lower peak interest rates over time, as the economy has become more and more dependent on “easy money” policies.

We could still be a year or more from the next peak, but this chart suggests the Fed will have little room to cut rates when the next crisis occurs. (And the recent failures of negative interest-rate policy mean the Fed is unlikely to go much below zero.) Instead, the Fed could be forced to launch a massive new quantitative easing (“QE”) program – or something even more extreme – in response.

In other words, despite what you might hear from the financial media today, the reasons for owning gold and silver remain as valid as ever. Invest accordingly.

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