Gundlach Warns: If the Fed Holds Rates, Long-End Yields Will Surge

Gundlach Warns: If the Fed Holds Rates, Long-End Yields Will Surge

TREE NEWS reports: DoubleLine Capital CEO and CIO Jeffrey Gundlach issued a triple warning on the eve of next week’s FOMC meeting: if the Federal Reserve does not hike, long-end interest rates will rise significantly; inflation is tracking the 1970s with “eerie” similarity; and AI-related corporate bond spreads have nearly doubled while U.S. equity valuations offer “no bargains — like a hotel minibar.”

Speaking on his latest “Gundlach Unlocked” webcast, Gundlach said he doubts the Fed will raise rates next week even though the market has priced roughly a 60% probability of a hike. “I wouldn’t be surprised if the Fed doesn’t hike next week. If that happens, I expect long-term rates to rise fairly significantly after the meeting,” he said. “If they do hike, the bond market may simply hold at current levels.”

Inflation: The 1970s Playbook Repeating

Gundlach dismissed optimism about cooling inflation. Core and headline PCE six-month annualized rates are running above their 12-month counterparts, and both remain far from the Fed’s 2% target. He overlaid the post-2014 inflation path against the 1960s-to-early-1980s surge, warning the shapes are “eerily similar” to the period before and during Paul Volcker’s tenure.

His preferred gauge — export and import price indices, which are unadjusted and non-seasonal — shows export prices up 8.25% year-over-year and import prices up 5.95%, averaging roughly 7% actual inflation. With Brent crude near $100 per barrel and global oil inventories at their lowest since 2018, he argued oil provides a floor that will make inflation stickier than the Fed hopes.

• The Bloomberg Commodity Index has risen 34% since the war began and is pressing 10-year highs.
• Residential electricity prices have climbed from about 12.5 cents to 18 cents per kilowatt-hour in roughly eight years, a gain exceeding 50%.
• The Strategic Petroleum Reserve has fallen from a peak of 750 million barrels to 287 million barrels, the lowest since its creation.

Credit Market Cracks: AI Bond Spreads Blow Out

Gundlach flagged a sharp divergence in credit markets. While broad investment-grade spreads are unchanged, AI-related investment-grade spreads have widened from 50 basis points to roughly 125 basis points. In high yield, AI-related spreads have ballooned from about 180 basis points to 325 basis points, even as non-AI high-yield spreads sit near yearly lows.

“This is a huge divergence we should really pay attention to,” he said, adding that AI-related bond supply “will continue to be an avalanche” that the market is struggling to absorb.

Equities: Concentration Means Danger

On stocks, Gundlach was bluntly bearish. The Shiller CAPE ratio stands at 42 times — higher than the 1929 bubble era — and historically, buying market-cap-weighted equities at such levels has produced negative real returns of 5% to 9% annually over the following decade, never a positive result.

Information technology now represents a record 38% of the S&P 500, exceeding both the 1999 dot-com peak and pre-2008 concentration. “This is an extremely concentrated market, which means it is an extremely dangerous market,” he said. “I would not recommend any market-cap-weighted equities.”

Dollar and Emerging Markets

Gundlach is bearish on the dollar, noting the DXY has slipped below 100 from 110 in late 2024. He sees a high correlation between dollar weakness and emerging-market outperformance, and expects EM local-currency debt to beat U.S. corporate bonds. Since late 2024, the S&P 500 has underperformed emerging markets by roughly 20%.

Fiscal Picture and TIPS Warning

Total U.S. public debt stands at $40 trillion and could exceed $50 trillion by 2032 on the current trajectory. Gundlach also rejected the idea that long-dated TIPS hedge nominal Treasury risk, noting 30-year TIPS and 30-year nominal yields have moved in lockstep since late 2021. “Don’t buy long-term TIPS thinking it will hedge your nominal bond risk,” he said.

Key Takeaways

• A Fed hold next week could trigger a significant rise in long-end yields; a hike may stabilize bonds.
• Inflation is running near 7% on unadjusted trade-price measures, with oil supply constraints adding stickiness.
• AI-related credit spreads are widening sharply — a warning sign for the hottest corner of the bond market.
• With the Shiller CAPE at 42 and tech at 38% of the S&P 500, Gundlach warns of negative real returns ahead for cap-weighted equities.
• He favors emerging-market stocks and local-currency debt over U.S. counterparts, and remains bearish on the dollar.