By Jules Rimmer
The so-called bond king had anticipated two rate cuts this year from the Federal Reserve, but a bombshell employment report now has him expecting a third.
In a wide-ranging interview on CNBC the founder, CEO and CIO of DoubleLine Capital, Jeffrey Gundlach discussed the Fed, the dollar DXY, the Treasury curve and inflation. His main talking points were predictions for easier monetary policy, for stocks to rally as a consequence, for the dollar to soften and for the U.S. Treasury curve to steepen (whereby long bond yields BX:TMUBMUSD30Y trade much higher than short-term notes).
His conviction that rates will be cut stems from the observation that 2-year Treasury note BX:TMUBMUSD02Y yields at 3.7% are some 70 basis points or so below the Fed funds rate (FF00). The bond market, he notes, is looking for a rate cut and as he points out, “the Fed always follows the two-year.” His views are reinforced by his relatively dispassionate approach to inflation. He thinks the Fed must look through the impact of tariffs and also points out that commodity prices generally are not flashing inflation signals, even with the propellant of a weaker dollar.
He quotes Milton Friedman to back up his argument: “Inflation is always and everywhere a monetary phenomenon” while highlighting that the M2 measure of money supply is not rising in an alarming way. Tariffs don’t increase money supply, he adds, and he prefers to watch import and export prices as a measure of capturing inflation. These readings average out around the Fed’s target at present.
Gundlach was positive on stocks because rate cuts take the pressure off stock valuations – lower rates means less competition from bonds and reduce the discount rate applied to future earnings streams – but his views are nuanced by his bearish stance on the dollar. While he thinks equities will rally in international markets as well as the U.S., a lower dollar will improve the returns on the former.
Gundlach also is of the opinion that the Treasury curve will continue to steepen, with the yield difference between the 2-year and 30-year bonds could jump from 110 basis points right now to 150 basis points. And, because Fed Chair Jerome Powell will most likely be replaced by a rates dove, this trend is likely to intensify as short-term yields fall.
Gundlach also makes the argument that lower tax revenue resulting from lower growth will mean increased bond issuance – particularly at the short end of the curve – to fund government expenditure.
Gundlach made one final recommendation: gold (GC00) , which he thinks benefits from the weak dollar, declining rates and technical trends in trading. “If you’re long gold, you haven’t anything to worry about,” he advises.
-Jules Rimmer
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08-05-25 0602ET
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