A summary of the view from our favorite Bond Guru, Jeff Gundlach
When the FED raises the federal-funds rate this year, longer-term bond yields will decline rather than rise, as a result of a surprising flattening of the yield curve. The 10-year yield could take out its 2012 low, especially if crude keeps falling to, say, $40 a barrel, which would only accentuate global deflationary forces. Likewise weighing on U.S. bond yields will be brisk foreign buying from investors in Japan and Europe, where long-term sovereign debt bond yields are mostly lower than U.S. rates, and economic growth prospects are less bright. When the FED ended QE, foreign buying easily replaced declining government support of the bond market. He thinks the U.S. dollar strength will continue, making U.S. bonds even more attractive, for not only do foreign investors benefit from higher relative rates, but they also win on currency translation profits.
Early in 2015, rebalancing of institutional portfolios from stocks to bonds will create some pressure on equities. Also, GDP growth for 2015 and 2016 is unlikely to hit the 3%+ annual target forecasts. That’s because the deflationary tide unleashed by a slowing world economy and excess capacity will begin to lap against U.S. shores by the middle of 2015. A strengthening dollar won’t help U.S. competitiveness.
There’s plenty wrong globally that will eventually weigh on the stock market: Emerging-market economies are sharply slowing. China rests on shaky ground. Greece is unraveling. Russia is a basket case. Currency wars impend, led by Japan’s systematic yen-devaluation campaign.
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