Watch the bond market and not the Fed for a steer on interest rates, billionaire investor Jeff Gundlach says
- The Federal Reserve has signaled it'll hike interest rates above 5%, but markets aren't buying it.
- Treasury yields should give a better idea of where rates will be at the end of 2023, Jeff Gundlach said.
Investors should be watching the bond market rather than the Federal Reserve if they're trying to gauge where US interest rates will stand at the end of 2023, billionaire investor Jeff Gundlach has said.
The DoubleLine Capital CIO said Tuesday that sub-5% Treasury yields are a strong indicator the US central bank will have started cutting rates by the end of the year.
"My 40-plus years of experience in finance strongly recommends that investors should look at what the market says over what the Fed says," Gundlach said in an investor webcast, per Bloomberg.
San Francisco Fed President Mary Daly and Atlanta Fed President Raphael Bostic both said Monday they expect the US central bank to raise rates past 5% and hold them there to bring soaring prices under control.
But markets aren't buying that.
The majority of traders forecast that the federal funds rate will be under 5% by the end of 2023, according to the CME Group FedWatch tool. That means they're expecting the Fed to start slashing the cost of borrowing at some point this year.
Yields on 2-year US Treasury notes were trading at 4.241% at last check Wednesday, suggesting that fixed-income investors are pricing in rate cuts as well.
The Fed's rate hikes weighed on stocks' performance last year, when the major US benchmark indexes all logged significant losses. A higher cost of borrowing eats into companies' future cash flows, which make up part of their overall valuation.
Global bonds in 2022 also slumped into their first bear market in over 30 years. Investors are able to earn higher yields if they park their cash in savings accounts, and that makes fixed income assets less attractive.
But Gundlach, who's often seen as one of Wall Street's "bond kings", is expecting fixed income to bounce back in 2023. That's because he thinks the Fed will have to slash interest rates later on in the year to stop the economy from sliding into recession.
The billionaire investor said investors should now be looking to build a portfolio that's 60% bonds, 40% stocks — an inversion of the traditional "60/40" stocks-to-bonds archetype that many investors favored until rising rates ravaged both asset classes in 2022.
"Bonds were hopeless; stocks were hopeless," Gundlach said about 2022 performance, according to CNBC. "The Fed was way behind the curve, and you knew that you were headed into a horror show."
"So it turned into a dumpster fire," he added. "And now relative to fixed income in particular, it's absolutely exciting in the fixed income market."