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Jeff Gundlach Sees 10Yr Treasury Rallying to 2.5%

Posted by Larry Doyle on June 23, 2010 9:42 AM |

Jeff Gundlach

Jeff Gundlach, CEO and CIO of Doubleline Capital, is delivering the keynote speech today at the Morningstar Investment Conference in Chicago. For a sneak peek at some of the pearls of wisdom and sense on cents that Gundlach will likely deliver, let’s review a Morningstar commentary shared with us by a good friend, Gundlach: Debt is Still the Problem:

1. What does Gundlach think about the government stimulus and its immediate and long-term impact on our economy?

Gundlach said the federal government’s stimulus package helped the economy grow for a year or two. But that growth isn’t organic. The stimulus, once over, will likely weaken the overall economy. He expects economic growth to slow within nine months to a year. Gundlach likens the stimulus to pouring a strong chemical fertilizer on top of some perennials. “It works great for a year because it’s basically like putting your perennials on steroids. Or amphetamines. In the short term that works,” he said during a recent interview. “But it ends up burning out the basic strength of the organism. And I think that’s the next stage in the economic cycle.”

2. What does he see on the horizon for our markets and economy?

“We’re starting to see tremendous volatility in the equity market. And we’re starting to see a flight to quality occurring, broadly speaking, again, in the commodity and credit markets,” Gundlach said. “To me, that suggests that the forecast of slow economic growth some several months ahead, or a couple of quarters ahead, is dovetailing with the message of the markets.”
He said the instability could last for several years. This is all part of what Gundlach sees as the problem of over-indebtedness in America. The earlier phase of the current credit meltdown was caused, in part, by consumers who were on a debt binge. He blames the next phase, which we are entering, on government debt.

Gundlach predicts the government will raise taxes in a “well-intentioned” move to balance the budget or attack the deficit. But this, in turn, will hurt the economy further. “As you attempt to raise taxes, what will end up happening is that it will take a bite out of economic growth,” he said.

3. What does Gundlach predict for government bonds?

He said there hasn’t been a single day when the U.S. government bond market has failed to be the beneficiary of risk concerns globally, especially over the euro. “And as long as that’s the case, the probability is the 10-year Treasury is going to go to the yield of two-and-a-half percent,” he said. “Which sounds very low, but it’s been there before. In Japan, when they were dealing with similar problems, the bond yield stayed below that level for 20 years. So the bond market outlook in government bonds, for the time being, is positive.”

Gundlach is a big believer that the overwhelming burden of global debts will lead to deflation and wealth destruction. He is a real visionary in terms of economic and market analysis. He also provides a wealth of sense on cents.

Thanks again to our Sense on Cents friend who pointed out this timely Morningstar commentary!!

LD

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  • Mike

    This makes a lot of sense.

    No growth w/o cutting the deficit, no cutting the deficit w/o slowing growth. What a catch 22!






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