Jeffrey Gundlach, CEO of DoubleLine Capital, hailed as the "Bond King," stated clearly on Tuesday (September 8th) that the federal funds rate should be raised by approximately 50 basis points. If the Federal Reserve holds steady at its policy meeting next week, long-term U.S. Treasury bonds may face renewed selling pressure, and yields are expected to continue rising. This view has garnered widespread attention against the backdrop of a historic correction in the bond market and a pronounced supply-demand imbalance.

There is a significant disconnect between policy interest rates and short-term yields.

In a webcast, Gundlach pointed out that the market is currently pricing in a 60% probability of a Fed rate hike next week, but he personally leans towards the view that policy will remain unchanged. Despite persistent inflation and strong economic activity indicators, he remains skeptical about the Fed's willingness to act. He specifically emphasized that, based on the yield on the two-year US Treasury note, the federal funds rate "seems to need to be about 50 basis points higher than it is now." Latest data shows the effective federal funds rate is around 3.63%, while the two-year Treasury yield is around 4.40%. This gap suggests that investors believe the current policy rate level is insufficient to adequately curb inflation, and short-term interest rates may need to remain in a higher range, or even rise further, over the next two years. This "disconnect" between the policy rate and the short end of the yield curve, while not as extreme as in 2022, has reappeared.

Long-term US Treasury bonds have a fragile structure, resulting in minimal resistance to yield increases.

Gundlach believes that the US 30-year Treasury bond remains structurally vulnerable. Since its 2020 lows, the 30-year Treasury yield has been significantly repriced, currently hovering around 5.25%. This adjustment has resulted in a paper loss of "more than 50%" on long-term bonds. However, after a nearly 500 basis point increase in yields, the market has failed to see a meaningful rebound, suggesting that further yield increases remain the path of least resistance. "When yields experience a near 500 basis point increase and the market still cannot rebound, it usually means the next move will be a continuation of the existing upward trend," he reiterated, reiterating his previous advice that investors should avoid long-term government bonds in all developed economies. If the Federal Reserve keeps interest rates unchanged, investors will push long-term Treasury yields higher; if it chooses to raise rates, the bond market may stabilize around current levels.

Supply pressure and term premium are the core drivers.

Gundlach attributed this round of bond sell-off to the massive issuance of US Treasury bonds and a surge in corporate financing demand, particularly from companies related to artificial intelligence. The market is struggling to absorb such a large supply of bonds. Higher real yields, persistent inflationary pressures, and a huge fiscal deficit mean that term premiums are likely to remain high for an extended period. Against this backdrop, Gundlach favors shorter-duration fixed-income assets, local-currency denominated emerging market bonds, and real assets over long-term government bonds. He anticipates that if the Federal Reserve again lags behind inflation, long-term US Treasuries may weaken further.

Editor's Summary

Gundlach's warning highlights the core contradictions in the current US Treasury market: the disconnect between policy rates and short-term yields, the lack of rebound momentum for long-term bonds after significant repricing, and the combined pressure of massive supply and high term premiums. Market expectations for next week's Fed meeting remain divided, but the vulnerability and upside risks of long-term US Treasuries have been clearly indicated. Investors need to closely monitor policy decisions and supply and demand dynamics, and rationally allocate asset duration and risk exposure.

Frequently Asked Questions

Q: Why does Gundlach believe the federal funds rate should be raised by another 50 basis points? A: He primarily bases his opinion on the significant gap between the two-year Treasury yield and the current federal funds rate. Latest data shows the effective federal funds rate is approximately 3.63%, while the two-year yield is around 4.40%. This gap reflects the market's belief that current policies are insufficient to adequately curb inflation, and that short-term interest rates may need to be higher in the future. While this "disconnect" is not as severe as in 2022, it has reappeared, suggesting room for policy rate increases. Q: What will happen to long-term Treasury bonds if the Fed doesn't raise rates next week? A: Gundlach expects investors to push long-term Treasury yields further up. The 30-year Treasury yield is currently around 5.25%, having been significantly repriced since its 2020 lows, resulting in a paper loss of over 50%, yet the market has not seen a meaningful rebound, indicating that the upward path remains the path of least resistance. If the Fed raises rates, the bond market may stabilize around current levels. Q: What are the main reasons for this round of Treasury bond sell-offs? A: The core issue is the massive issuance of US Treasury bonds and the surge in financing demand from companies, especially those related to artificial intelligence, making it difficult for the market to absorb the huge supply. At the same time, higher real yields, persistent inflationary pressures, and a large fiscal deficit have pushed up term premiums, making long-term bonds more vulnerable. Q: How does Gundlach advise investors to allocate fixed-income assets? A: He favors shorter-duration fixed-income assets, emerging market bonds denominated in local currencies, and real assets, explicitly advising against long-term government bonds in all developed economies. Given the risk that the Fed may lag behind inflation and that long-term US Treasuries may weaken further, shortening duration helps reduce losses from rising interest rates. Q: What are the current implications of the US Treasury market for investors? A: Policy and market expectations may be out of sync. Long-term bonds still lack support for a rebound after a significant correction, and supply and term premium pressures persist. Investors should pay attention to the outcome of next week's Fed meeting, assess inflation and fiscal data, reasonably control duration risk, and consider diversifying into shorter-duration, emerging market, or real assets to cope with potential further selling pressure.