Gundlach Says Low Foreign Demand May Help Boost Treasury Yields

(Bloomberg) -- A mismatch between supply and demand in the Treasury market is likely to keep driving yields higher, DoubleLine Capital’s Jeffrey Gundlach said Tuesday on an investor webcast.

Foreign holdings of U.S. government securities have been “shrinking pretty substantially,” the bond manager said, in part because the cost of hedging is making the trade unattractive. Domestic buyers have been stepping in to fill the gap, according to Gundlach, but he said they will keep doing so only if yields can outpace inflation.

Gundlach also said:

• His models show inflation below 2 percent in the coming months. The impact of tariffs could spark higher inflation at some point.
• The simultaneous increase in government borrowing and increased cost of that borrowing could become “a problem within five years.”
• He sees risks building in both the corporate bond markets, due in part to worsening debt profiles. If ratings companies begin cutting investment-grade ratings in line with issuers’ deteriorating leverage ratios, the junk market will be inundated and spreads driven wider. “It’s hard to see how the high-yield market will absorb any significant downgrading of the investment-grade market.”

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