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NEW YORK (Reuters) – Jeffrey Gundlach, the chief executive of DoubleLine Capital and known on Wall Street as the “Bond King,” said on Tuesday the yield on the U.S. 10-year Treasury note will likely move higher and pressure riskier assets including equities and junk bonds.
Gundlach, on an investor webcast, said massive U.S. Treasury supply to fund the ballooning U.S. budget deficit this year along with “Quantitative Tightening”, or unwinding of the Federal Reserve’s balance sheet, will lift bond yields.
“What’s unusual is that the deficit is expanding even though we are late cycle,” in the economic recovery, said Gundlach, who oversaw over $118 billion in assets as of December 31. Gundlach projects the U.S. federal budget deficit to rise to over $1.2 trillion – $1.3 trillion in 2019.
Gundlach said the yield on the 10-year Treasury note rising above 3.0 percent would almost certainly hurt risk assets, such as equities and high-yield junk bonds.
More importantly, Gundlach says conviction is high that the Standard Poor’s 500 stock index return will be negative in 2018.
“My conviction on that is actually higher than my conviction right now on whether bond yields are going to break to the upside or downside,” Gundlach said.
On Tuesday, the yield on the U.S. 10-year Treasury was trading at 2.84 percent.
Gundlach said it is “disconcerting” that U.S. Treasury Secretary Steven Mnuchin does not recognize signs of inflation. Last month, Mnuchin said the economic policies of President Donald Trump and his administration could successfully lift the wages of American workers without triggering overall higher inflation.
“Of course, inflation is inflationary. Of course, rising wage inflation – all things being equal – is inflationary. Yes, it’s possible that some other sector of the economy could be incrementally deflationary and offset the rising wage inflation. But I don’t see any reason to believe that that’s the base case. We don’t see any deflationary patterns right now,” Gundlach said.
“And if we raise tariffs, if we raise prices on goods, that as well is inflationary,” he added.
Overall, he said, Bitcoin is a good precursor for stock market movements. “Bitcoin is part of the Rosetta Stone to understand what is happening with the social mood,” he said.
“We went from an easy investing environment to a tough investing environment,” Gundlach added.
Regarding the U.S. dollar, Gundlach said DoubleLine is “neutral” on the greenback but “the next big move on the dollar is lower.”
Reporting By Jennifer Ablan and Trevor Hunnicutt; editing by Clive McKeef