Star bond investor Jeffrey Gundlach, CEO of DoubleLine, agrees with the consensus that the Federal Reserve will raise interest rates this year.
But unlike most economists, who think the rate hikes will push long-term bond yields up,
Gundlach tells Barron's he thinks they will fall. Indeed, the 10-year Treasury yield might break its record low of 1.38 percent, he predicts.
That mark was set in July 2012. The yield stood at 2.12 percent late Friday.
Bond yields are especially likely to decline if the plunge of oil prices continues, Gundlach explains. No one knows when oil prices will stop falling, he notes. Declining oil prices help bonds because of their deflationary impact.
"When you have a market that showed extraordinary stability for five years — trading consistently at $90 [a barrel] or above — undergo a catastrophic crash like this one, prices usually go down a lot harder and stay down a lot longer than people think is possible."
Foreign investors also will flock to U.S. bonds, turning away from the low yields and weak economies of Europe and Japan, Gundlach said.
"The strengthening dollar, which we think will continue, only makes U.S. bonds all the more attractive, for not only do foreign investors benefit from higher relative rates, but they also win on currency translation profits," he said.
But Richard Schlanger, a fund manager at Pioneer Investments, thinks the bond market is living on borrowed time.
"The big picture is that the era of zero interest rates is coming to the end, and the bond market is going to adjust," he tells
The Wall Street Journal.
Still, Gundlach has some history on his side. Expectations of higher bonds yields have been dashed before, most recently last year.
Many market participants predicted the 10-year Treasury yield would end 2014 around 3.5 percent, after closing 2013 at 3.04 percent. Instead, it finished last year at 2.17 percent.
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