Gundlach, Fidelity Differ on Treasuries as Citi Says Buy on Dips

(Bloomberg) -- Jeffrey Gundlach and Fidelity Investments differed in their outlook for Treasuries as Citigroup Inc. advised buying the securities on dips as the U.S. economy and inflation are unlikely to strengthen later this year.

Gundlach, chief investment officer at DoubleLine Capital LP, said on CNBC the U.S. 10-year note yield will rise above 2 percent in 2016 and a Federal Reserve interest-rate increase in December isn’t a given. Bill Irving, co-manager of Fidelity Government Income Fund, said yields will remain low and there’s a 60 percent chance of a Fed increase by year-end.

“Yields will remain at historically low levels for some time,” Irving said, according to the transcript of an interview on Fidelity’s website. “In that environment, I’d be cautious about reaching for yield.”

The two money managers agreed the world’s largest economy faces challenges. While signs of labor-market strength have led bond traders to price in a growing likelihood of a rate increase by year-end, other data such as August retail sales and industrial production have shown declines.

Benchmark Treasury 10-year notes were little changed Thursday. Yields dropped the most in two weeks Wednesday after the Fed held off on raising interest rates and scaled back the number of rate hikes it expects next year.

The U.S. 10-year note yielded 1.64 percent as of 6:50 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.5 percent security due in August 2026 was 98 22/32. The yield will climb to 1.72 percent by year-end, according to the weighted average in a Bloomberg survey of analysts that places a greater emphasis on most-recent projections.

Positive Return

Treasuries have returned 4.6 percent in 2016 as economic circumstances in the U.S. and abroad caused the Fed to delay tightening policy multiple times after a liftoff from near zero in December. The central bank left its key rate unchanged for the sixth straight time Wednesday.

“The strategy going forward is to buy duration on dips for investors who agree with us that economic activity and inflation data are unlikely to strengthen into year-end,” Jabaz Mathai, a rates strategist at Citigroup in New York, wrote in a research note. The bank likes the seven-year part of the yield curve and also expects the longer end to do well, he said.

Duration is a measure of a bond’s sensitivity to changes in yield, and a larger figure indicates a more bullish position.

To contact the reporter on this story: Narayanan Somasundaram in Sydney at nsomasundara@bloomberg.net. To contact the editors responsible for this story: David Goodman at dgoodman28@bloomberg.net, Keith Jenkins