tl;dr
Billionaire Jeffrey Gundlach predicts the Federal Reserve will likely need to implement quantitative easing to support the U.S. Treasury market due to weak demand for long-term Treasuries, which is causing yields to rise. He suggests that once yields reach about 6%, the Fed will pivot to buying long...
Billionaire Jeffrey Gundlach predicts the Federal Reserve will likely implement quantitative easing (QE) to support the U.S. Treasury market as demand for long-term bonds weakens and yields rise toward 6%. He compares this potential pivot to the 2020 Covid-era money printing campaign.
Gundlach explains that rising yields are driven by insufficient demand for long-term Treasuries amidst a large budget deficit and looming recession risks. Once yields hit around 6%, the Fed may begin purchasing long-term Treasuries to stabilize the market and manage borrowing costs.
In an interview at the Bloomberg Credit Forum, the DoubleLine Capital founder emphasizes that QE involves the central bank buying government bonds to inject money into the economy, increase money supply, and push down long-term interest rates. Gundlach notes a significant shift toward short-term bonds this cycle, with investors like Warren Buffett’s Berkshire Hathaway holding at least 5% of the short-term T-bill market.
He advises investors to buy long-term Treasuries ahead of any official announcement, anticipating a strong rally similar to the market rebound seen when the Fed started buying corporate bonds during the Covid crisis. Gundlach envisions this pivot as a necessary response to a projected $5 trillion budget deficit combined with recession pressures, making quantitative easing on long-term Treasuries the leading candidate strategy.
If the Fed announces QE, Gundlach forecasts a rapid and substantial rally in long-term bonds, akin to the dramatic recovery of corporate bonds back in 2020, potentially offering investors a 20-point gain in a matter of days.