Gundlach Warns of Fresh Treasury Selloff if Fed Holds Rates
Jeffrey Gundlach says if the Fed holds rates next week, long-dated Treasury yields could rise further; he favors short-duration and EM debt.
Influential bond investor Jeffrey Gundlach has cautioned that if the Federal Reserve leaves interest rates unchanged at its upcoming policy meeting, long-dated Treasury yields could resume their climb, deepening the bond market's historic selloff.
Speaking in a webcast on Tuesday, the DoubleLine Capital chief executive said market pricing suggests about a 60% chance of a rate hike, but he is "leaning against" that outcome, citing doubts about the Fed's willingness to move despite firm inflation and resilient economic activity.
Gundlach noted that the fed funds rate appears "about 50 basis points higher than it is right now" based on the 2-year Treasury yield, which stood at 4.998% on Tuesday versus a fed funds rate of 3.63%. He described the policy rate as again "out of sync" with the front end of the curve, though less dramatically than in 2022.
The wide gap between the 2-year yield and the fed funds rate suggests investors expect the current policy stance to be insufficient to contain inflation, implying short-term rates may need to stay higher or rise further over the next two years.
If the Fed holds rates steady, Gundlach expects investors to push long-dated yields higher. Conversely, if the Fed hikes, the bond market may stabilize near current levels.
He argued that 30-year Treasuries remain structurally vulnerable after a massive repricing from a 2020 low to roughly 5.25% on Tuesday. That move has already produced mark-to-market losses of "over 50%" on the long bond, yet the absence of any meaningful retracement suggests the path of least resistance is still higher in yield.
"If you get a nearly 500-basis-point rate move and the market can't rally, it usually means the next move is a continuation of the upward trend," he said, reiterating his advice to avoid long-term Treasuries "everywhere in the developed world."
He added that some DoubleLine funds continue to run outright short positions in 30-year U.S. bonds, a stance that has "worked quite well" in recent years.
The 10-year Treasury yield has been trading near its highest level since October 2023, while the latest selloff has pushed 30-year yields to their strongest level since 2007.
Gundlach tied the bond selloff to a toxic mix of heavy U.S. fiscal issuance and surging corporate supply, particularly from AI-related borrowers, arguing that markets are "having a hard time digesting this amount of paper."
He warned that structurally higher real yields, persistent inflation pressures, and large deficits point to a prolonged period of elevated term premia.
Against that backdrop, Gundlach favors shorter-duration fixed income, local-currency emerging market debt, and real assets over long-maturity Treasuries, positioning for further weakness at the long end if the Fed again falls behind the curve.