Jeffrey Gundlach, chief executive and chief investment officer of DoubleLine Capital, has warned that plans for lower corporate taxes might result a bond-unfriendly environment.
In a Tuesday webcast, the famed bond investor said that now was a ‘strange environment’ to be cutting corporate taxes given that the conditions in the US were still robust economically.
‘A tax cut will reduce revenue and it will grow the deficit and therefore, it will probably grow bond supply and perhaps boost economic growth,’ said Gundlach. ‘And if it does... it is going to be bond unfriendly.’
He also noted that commodities should on be the radar screens of investors with prices could set to continue to rise as the dollar consolidates.
He compared the total returns of the S&P Goldman Sachs Commodity index with those of the S&P 500 index over the last several decades, which he said illustrated that commodity price dips or contractions are usually followed by a sharp rise in equity markets, while commodity price increases were followed by stock market withdrawals.
‘We're right at that level where in the past you would have wanted commodities instead of stocks,’ he said. ‘Commodity prices have actually bottomed out. You get a huge rise in commodity prices going into recession. On your radar screen should be commodity prices, there hasn't been a recession without an increase in commodity prices.’
However, Gundlach reiterated that he does not see an economic recession in the near term. He said it could come in a year or 18 months but not in the next six months.
He also pointed out that the flattening yield curve between the 2-year and 10-year Treasury yield is ‘getting to the point where it's worth watching’ while repeating a previous prediction that the 10-year Treasury yield could reach 6% in the next ‘four years or so.’
The current yield on the 10-year Treasury is 2.36% and has not seen much momentum as the Federal Reserve continues with its quantitative tightening measures, he added.
Gundlach also said the Fed was poised to raise rates next week but that he was more worried about the the cumulative effects of quantitative tightening. He believes such tightening measures may at least slow momentum in risk asset markets but said he was still bullish about emerging markets.
Although suggesting caution on high yield bonds, Gundlach shrugged off the recent sell-off, saying that it was just a ‘wiggle and jiggle’ and not big enough yet to cause a recession.
‘We are not concerned about a little wiggle and jiggle, we are worried about the big rock. Watch this space to see if the big rock actually shows up, so far that hasn’t happened,’ he said.
Citywire + rated Gundlach’s $53.9 billion DoubleLine Total Return Bond fund, which he co-manages with Citywire AA-rated Philip Barach, has returned 9.1% over the past three years until the end of October and ranks 4 out 29 US Mortgage funds tracked by Citywire.