Fed Tightens, “and so far, Nothing Has Blown Up”, by Wolf Richter

The end of the world will come on its own timetable, not the Fed’s. From Wolf Richter at wolfstreet.com:

Gundlach frets about bonds during QE unwind, rate hikes, tax cuts, and rising deficits.

“A tax cut will reduce revenue and it will grow the deficit and therefore, it will probably grow bond supply, and perhaps boost economic growth,” DoubleLine Capital CEO Jeffrey Gundlach said on an investor webcast on Tuesday. And if it does, “it is going to be bond unfriendly.”

And possibly in a big way.

It’s a “strange environment” for cutting corporate taxes as the economy is already in its eighth year of expansion, he said, according to Reuters, which reported the webcast. He reiterated his prediction that the 10-year Treasury yield could reach 6% over the next “four years or so.”

Let that sink in for a moment. The last time the 10-year Treasury yield was at 6% (on the way down) was in August 2000! Four years from now, 6% would be a two-decade high-water mark.

“I don’t think it is at all strange to think we can tack on something like 75 basis points, on average, with volatility of course, per year for the next four years or so,” he said.

The 10-year yield is currently 2.36%, and sliding, as opposed to the shorter maturities whose yields have surged: the three-month yield reached 1.30% today and the two-year yield jumped to 1.83%, the highest since September 2008.

When bond yields rise, bond prices fall by definition. The 10-year yield is still very low. But if it rises from this level to 6% over the next few years, there will be a lot of wailing and gnashing of teeth along the way by bond investors, and it’s not going to be a fun time for a bond-fund manager to navigate this environment.

To continue reading: Fed Tightens, “and so far, Nothing Has Blown Up

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