Weak first-quarter U.S. GDP growth isn’t the only reason why long-term Treasury bonds have climbed 11 percent so far this year, according to DoubleLine CEO Jeffrey Gundlach. There was a huge short position betting against U.S. Treasurys early in 2014 that helped fuel their outperformance.
As of June 9, 30-year Treasurys have enjoyed their third strongest year-to-date returns since 1974, a fact that has escaped many market observers. So far this year, long-term Treasurys have outperformed overpriced high-yield bonds by 600 basis points. Gundlach thinks that the more closely watched 10-year Treasury bond could remain locked within a band of 2.2% to 2.8% for the rest of the year.
Over the longer term, Gundlach sees the dollar breaking out to the upside, thanks to a combination of global demographics and cheap money policies in Japan and Europe as the U.S. passes the quantitative easing baton to nations that have exhibited even weaker recoveries from the financial crisis. Speaking in a webcast on Tuesday, the DoubleLine founder pinpointed several incongruities in global government bond markets.
Though it might defy popular logic, gold could also rise to the $1,500 area at the same time as the U.S. dollar and Treasurys rise. Goldman voiced less about gold than he did with the dollar. “The euro has a lot of political desire to be weakened when it gets to the $1.40 [to the dollar] area,” Gundlach said.
How can Spanish 10-year government bonds yield almost exactly the same 2.6 percent as their U.S. counterparts? It’s true that the odds of a Spanish default are much lower than they were two years ago, but over the same period the U.S. federal budget deficit has declined to the 2.6 percent area.
French 10-year government bonds yield 1.8 percent while Germany’s pay 1.4 percent. Purely from a yield viewpoint, Treasurys offer almost double the return of German bunds.
Europeans will want to hold dollars for higher yields and a currency move up.
Global demographic trends are likely to translate into “dramatically lower GDP growth rates” around the world over the next several decades as dependency ratios—the number of people under 20 or over 65 years old compared to the total population—soar in many developed nations, he said. In this respect, Gundlach said the U.S. is in much better shape than most developed nations, though it America will still face its own serious demographic challenges.
But as far as U.S. equities go, the DoubleLine CEO sees the small liquidation of margin debt in the last two months as a possible cause for concern. "It is hard to see new highs in the S&P 500 and margin debt liquidation continuing" simultaneoudly, he said.
Looking at global equities, Gundlach noted that the Shanghai index is trading in an increasingly narrow band, which means a breakout is likely at some point. He admitted he didn’t know which way Chinese would break out but he believed any move would be major one.
Gundlach also thought other beaten-down emerging market equities might break out to the upside.
On the subject of housing, Gundlach expressed dissatisfaction with articles claiming he had predicted a collapse in the housing market, saying they were inaccurate. He did say there was a "massive divergence" between homebuilder stocks and lumber prices, indicating both price trends couldn't be correct.
He believes that the millennial generation that came of age during the 2008-2009 housing crisis will bear permanent scars from the event, in which many young Americans saw their parents or neighbors either lose their homes or reduce their lifestyles due to under-water mortgages.
"I don't think housing will collapse or have a crisis," he said. But new home sales will be "less of a support" for the economy than they have in the past.