Bond guru Jeffrey Gundlach has tipped the Federal Reserve to return to ‘old school’ ways and raise rates sequentially ‘until something breaks.’
Citywire A-rated Gundlach, who is chief executive of DoubleLine Capital, said he expected the central bank to raise rates two or three times this year and that economic data supported a hike later this month.
‘Confidence in the Fed has really changed a lot,’ he said on a webcast on Tuesday.
‘The Fed has gotten a lot of respect with the bond market listening to the Fed. They would say that they would raise rates and people would laugh. That changed with unemployment and inflation, there is no more excuses not to raise rates.’
Next week, the Fed is expected to raise interest rates by 25 basis points for the first time this year, following a hike at the end of 2016, only the second such move in a decade.
It previously went in December 2015 and at the time outlined plans to raise rates as many as four times in 2016, but this plan changed due to weaker than expected economic data and global political upheaval.
In December last year the Fed suggested it would hike three times in 2017, a plan Gundlach (pictured above) believes is plausible if economic indicators maintained their current trajectory, with unemployment below 5% and inflation above 2%.
He said the something that breaks could be a recession, but that he did not see one on the horizon.
Away from the US market Gundlach repeated his warning about European bonds, particularly German bunds, which he said were falsely depressed by quantitative easing and vulnerable to political risk from upcoming elections across the continent.
‘I don’t like European stocks and I wouldn’t go anywhere near European bonds,’ he said. ‘There is a ton of downside risk in European bonds. I own none of them.’
He added it would be smart to short German 10-year bonds.
In April 2015, he said that he was considering making an amplified bet against German bonds.
He also restated his praise for Puerto Rican municipal debt.
'Puerto Rico bonds have been killing it,' he said. 'We were recommending those years ago. Since we picked them up, they’ve never missed a payment. They are the best investment in the entire fixed income market.’
In June, the Puerto Rico Oversight, Management and Stability Act, was passed which allowed the territory to restructure its mountain of debt through a federal control board.
In May of 2015, Gundlach recommended buying Puerto Rico municipal bonds due to their yield, despite the associated risks. He also said that Puerto Rico was committed to repaying debt in full and on time.