Prior to getting into this commentary, a quick reminder that bond prices move in the opposite direction of interest rates. With interest rates generally declining since the 1980’s, bond prices have enjoyed a bull market for the past 30+ years. According to Jeffrey Gundlach, aka the “Bond God”, we may be seeing the 30 year bull market in bond prices coming to an end. This is certainly a contrarian viewpoint, but often when everybody says something can’t happen (such as interest rates going up), that’s exactly when it happens*.
Irrespective of whoever wins the November election, both Mr. Trump and Ms. Clinton have promised massive infrastructure programs which would require massive Government spending, which would then require more Government borrowing, which would then require the Government to sell more Treasury Bonds, which should push down bond rises and raise interest rates*.
You should be asking this question: Isn’t this exactly what the Fed has been doing for the past eight years? The answer of course is yes. The follow up question becomes: How is this going to be any different? Gundlach predicts that central banks, i.e. the Fed, will be forced to raise interest rates to avoid a total collapse of the global banking system*.
Is Gundlach right? Maybe, maybe not. If he is right, our strategy is to buy short maturity (1-2) year CD’s and “ladder” your portfolio up as interest rates go up. Our portfolios hold ample Cash and are liquid enough to allow us to use the “CD ladder” strategy.
Further evidence that Gundlach may be right is that we have seen the yield on the 7-10 year Treasury (IEF) and the 20+ year Treasury (TLT) both rise over the past several weeks, resulting in a corresponding drop in the share prices of both securities.
* The Stansberry Digest. October 10, 2016
These are the opinions of Jeffrey Gundlach and Justin Brill and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
