As the Federal Reserve enters the second day of its closed-door meetings Wednesday, bond king Jeffrey Gundlach, CEO of Los Angeles-based money manager DoubleLine Capital, said the Fed has "painted itself into a corner."
As Pensions & Investments reported earlier this week, Federal Reserve watchers expect for rates to go up another 75 basis points as the Fed simultaneously attempts to slow inflation and rein in its quantitative easing program.
"If they would have taken my advice back in April or May, where I said they should just hike 200 right now and see what happens," he told listeners Tuesday afternoon on a Twitter Spaces interview hosted by Pensions & Investments Editor-in-Chief Jennifer Ablan. "But, they did it over a three-month period — they went up 50, then 75, then 75. I think they should raise rates maybe 25 basis points tomorrow, but of course, that's not going to happen in the context of core CPI surprising so much on the upside at this moment."
Mr. Gundlach added that because the Fed is pursuing quantitative tightening, there may be new opportunities in bonds. "People are getting conservative, which ultimately leads to an opportunity," he said.
Bonds started the year overvalued and have dropped significantly, he said. Mr. Gundlach estimated that 30-year Treasuries have seen a drawdown of 40% since their peak in April 2020. However, 2-year Treasuries, which have rebounded significantly in response to recent rate rises, are up 400 basis points over the last year. Ten and 30-year Treasury yields have increased as well, Mr. Gundlach said.
Spreads in riskier parts of the credit universe including junk bonds, bank loans and emerging markets have also widened. "You can actually take a relatively conservative risk asset portfolio and get a return that is close to 8%. And, you're talking about prices that are down very substantially ... many of these have a very strong possibility of rallying from those prices," he said.
If that rally materializes, yields on risk assets could go much higher over the near term. "You could actually get bond portfolios over the next 12 months (where) it is not implausible to think you're going to get over 20% (return) from bonds," Mr. Gundlach said.