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'Bond God' Sees Long-Term Rates Below 2%By
Thursday, April 6, 2017
"What kind of fool would bet on LOWER interest rates?"
I asked that question a week ago here in DailyWealth.
The answer was, "ME... And nobody else."
Or so I thought...
But Jeff Gundlach – nicknamed the "Bond God" because of his prescient bond market forecasts – has joined me...
Gundlach manages more than $100 billion through his investment firm, DoubleLine Capital. This week, he updated his investors on his thoughts for the rest of the year.
His comments about long-term interest rates were particularly important.
For context, the benchmark long-term bond is the 10-year U.S. government bond. It peaked this year at an interest rate above 2.6%, and is currently below 2.4%.
"I expect a rally on the 10-year," Gundlach said. A "rally" means higher bond prices – and therefore, lower interest rates.
How low can interest rates fall? Gundlach predicts they will fall "to below 2.25%, at a minimum... maybe a bit lower than 2%." He added that he expects rates to move back up after that point.
How high could the benchmark Treasury bond go in 2017? "I don't think we're going to see 3% on the 10-year this year," he said.
I explained why interest rates could fall in my essay last week – nobody believed long-term rates could fall while the Fed was raising short-term interest rates. Bets reached a record high on this idea. I said they were all wrong. And based on Gundlach's webcast, he agrees. We've been right so far.
Gundlach added another important reason why U.S. long-term rates could come down...
Interest rates in the U.S. are dramatically higher than they are in the rest of the developed world. For example, comparable 10-year bonds in Germany and Japan pay next to nothing in interest – 0.25% or less. So international investors have huge incentives to take their money out of their low-yielding government bonds and move it into U.S. bonds.
Are you ready for long-term U.S. interest rates to be less than 2%?
You ought to be prepared for the possibility. The world's best bond investor says it could happen... And I wouldn't bet against him...
Good investing,
Steve
Further Reading:
"Everyone is betting on higher interest rates," Steve wrote last week. But this trade is crowded... which means we should expect the opposite. Learn more here: The Most Contrarian Trade You Will Ever Make.
"Despite the long-term downtrend, most people are convinced that rates will head higher from here," Steve writes. But one "smart money" signal showed rates could go higher, when everyone else was calling the bottom. Read more here: We Could See LOWER Interest Rates in Early 2107.
Market NotesTHIS INDUSTRY'S DEMISE IS GETTING CLOSER Today's chart highlights the impending death of rental-car companies...
Last October, Porter and his research team alerted Stansberry's Investment Advisory subscribers to the "next dominoes" to fall in the auto sector. They predicted that massive auto-loan defaults in the coming years would kill highly leveraged rental-car businesses.
Porter and his team suggested selling short shares of $1.3 billion firm Hertz Global (HTZ). Sure enough, on November 7, the company reported weak earnings and cut its expectations for future growth. Its share price plunged more than 50% the next day in the first few hours of trading... wiping out more than $2 billion from the accounts of some of the world's best investors, including Carl Icahn.
As you can see in the chart below, Hertz Global shares have kept falling as investor panic spreads. Shares lost around one-fifth of their value two weeks ago after a sharp fall in used-vehicle prices. The rental-car stock (which was spun off from the main company in July) has declined roughly 60% since Porter's call – and it just hit a fresh all-time low. It's proof that the next domino is nearly all the way to the ground...
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