The Federal Reserve will not raise interest rates this year, contrary to the general consensus, said Jeff Gundlach, CEO and chief investment officer of DoubleLine.
The economic data will not support a rate hike, he said at the HighTower Apex conference in Chicago on Wednesday.
As for when the Fed actually will raise rates, he said watch for when the hourly earnings data starts to rise in the Department of Labor’s monthly employment report.
“When hourly earnings are rising, it’s a good signal the Fed will raise rates,” Gundlach said. “It’s one of the most important indicators. If it goes higher, I think the Fed will have a clearance to tighten, but we’re not there yet.”
The Fed’s Federal Open Market Committee meeting on June 16 and 17 may mark the chance for the central bank to start talking more about the path of interest rates, he said.
“The Fed is in a tough spot. At this meeting coming up this month, I think the Fed has to say something that’s different. They’ve been incredible incremental on how they talk about things,” Gundlach said.
He said he believes interest rates have bottomed and roughly did so in July 2012 and are now rising gradually. That will make holding interest-rate sensitive vehicles like high-yield bonds, or as he called them, junk bonds, difficult.
Contrary to popular belief that junk bonds do well in a rising interest-rate environment, Gundlach said they do not. He called them “summer insects,” based on a saying from the Daoist Chinese philosopher Chuang Zhu, who wrote “you cannot discuss ice with a summer insect; It is bound by a single season.”
Junk bonds are similar. “Junk bonds are a summer insect. They have never experienced a secularly rising interest-rate environment. They didn’t exist in the 1980s,” he said. 
Gundlach said the conventional wisdom is to hold junk bonds rather than Treasury bonds during times of monetary policy tightening by the Fed, but he said data does not back up that belief. Looking at the spread between high-yield credit and the Federal funds rate, holders of junk bonds did better each time if they sold junk bonds and bought Treasury bonds each time, he said. This was the case in interest rate rises in 1987, 1994, 1996, 1998 and 2004, he added. 
“When the Fed hikes, on that day, sell junk bonds and buy Treasuries, which is the opposite of what you hear day after day on CNBC. It’s exactly wrong,” he said.
Gundlach said right now it’s OK to still hold junk bonds. “I’m not predicting a collapse in junk bonds. I own more than is typical, because the problem isn’t imminent. You have time to act on it. But watch out in 2019, 2020, when these maturities are coming up,” he said.
His concern about that time frame is what will happen if interest rates are rising when a lot of other debt is coming into maturity. He said the Fed has a lot of debt maturing at that time, too. While the Fed can buy these bonds, if they don’t, then they will be on the market. 
Also at that time is when social programs such as Social Security and Medicare will see a greater number of participants, he said. 
“Even with 4 percent nominal GDP (gross domestic product) growth, you have $500 billion coming from the Fed’s balance sheet, junk bonds and loans … $3 trillion in debt due in a rising interest-rate environment. Sounds like a problem for the junk bonds.  Sell on strength is my message for junk bonds,” he said.