Lower Interest Rates Forecast for 2015
Interest-Rates / Global Financial System Dec 03, 2014 - 09:19 AM GMTBy: DailyWealth
Steve Sjuggerud writes: "It seems to me almost unthinkable that U.S. interest rates could rise in any meaningful way," Jeff Gundlach said on CNBC last week.
Jeff Gundlach is "The New Bond King" according to Forbes.
To be crowned King of the bond world, you must know interest rates better than anyone else on the planet. Gundlach has earned his place.
By saying interest rates won't go up, Gundlach is going against, well, everyone...
"Entering 2014, everybody was negative... 68 out of 68 economists said [interest] rates would rise." Gundlach told CNBC. "And yet, there were all kinds of reasons to like Treasuries."
What reasons are there to like U.S. government bonds? And how could Gundlach possibly expect interest rates on U.S. government bonds to go lower?
It's simple... It's all about relative value...
Gundlach pointed out that interest rates on government bonds in Italy and Spain are around 2%, and interest rates in France are around 1%.
Which would you rather accept:
a) 1.8% interest from the Spanish government, or…
b) 2.2% interest from the U.S. government
Gundlach would take the U.S. government bonds – he sees U.S. government bonds as a better relative value.
It's not just government bonds... Gundlach says that, compared to U.S. corporate bonds and U.S. municipal bonds, U.S. government bonds are still "cheap."
What's Gundlach's outlook for the next two years? He explained it on CNBC:
I think that the surprise will be – and I don't know if it's 2015 or 2016 – I think the surprise will be how low a level the U.S. yield curve flattens at... I think the yield curve is going to flatten at a level previously thought unthinkable.
When you get what he is saying, it is a big prediction...
If the Federal Reserve raised interest rates from basically zero up to 1.50%, and if the interest rate on U.S. government bonds fell from 2.20% to 1.50%, then the yield curve would be totally "flat."
If the yield curve "flattened out" at 1.50%, then that really would be "unthinkable."
In short, Gundlach is predicting that the Fed will raise interest rates... but that long-term interest rates will basically NOT go up much at all... they could even go DOWN.
You may disagree... But don't dismiss the possibility of lower rates... If you are betting on higher long-term interest rates, please realize that you are betting against the New Bond King... I wouldn't want to bet against him about bonds in 2015...
Good investing,
Steve
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