Jeffrey Gundlach, chief executive officer at DoubleLine Capital, said on an investor webcast on Thursday that Federal Reserve officials are determined to show they are independent from market forces and may hike rates even as investors bet they will not.
“They want to show that they are not guided by the markets,” Gundlach said in a telephone interview following the DoubleLine webcast. “The Fed wants to show, at some point, that they can’t be replaced by WIRP (World Interest Rate Probability). The only way they can do that is to tighten when WIRP is below 50.”
Gundlach, who oversees more than $100 billion at Los Angeles-based DoubleLine, said he expects the Fed to tighten when investors place odds around 40-45 percent. Currently, WIRP sits around 28 percent for the Fed’s next meeting on Sept. 21.
By trying to prove its independence from the WIRP, the Fed might be “blowing itself up,” Gundlach said. The Fed will not hike in September if the WIRP is below 40 and the S&P 500 is below 2150, he said on the webcast.
The ISM non-manufacturing PMI released earlier this week is at the lowest level since 2009, and it is almost on recession watch. “Clearly, it’s a bad environment to be raising rates,” yet some Fed members are talking about two rate hikes between now and the end of the year, Gundlach said.
Gundlach said investors should get defensive with bonds. He said he is sensing a “bond unfriendly turn” such as fiscal stimulus and that bond yields bottomed several years ago.
Gundlach said DoubleLine has a shorter aggregate duration than the broad bond market and most bond funds because “rates have bottomed and have begun to rise on a secular basis. In fact, they have been rising on a secular basis for over four years already,” he said by telephone.
Gundlach told Reuters this summer that his firm went “maximum negative” on Treasuries on July 6 when the yield on the benchmark 10-year Treasury note hit 1.32 percent. The 10-year now yields around 1.60 percent.
All told, Gundlach said he turned short-term negative on gold and gold miners but has not sold any of his firm’s positions. He also said DoubleLine’s bet on emerging-market debt over high yield “junk” bonds have paid off, given that EM has posted returns of more than 15.2 percent so far this year.