Jeff Gundlach says US bond rates could hit 6%, but he's not sure what to think about stocks right now

US 10-year treasuries hit a high of 2.15% last week in the wake of Donald Trump’s US presidential win. That’s the highest level since January this year and a clear break of the downtrend 10-year bonds in the US have seen since 2013.

Over the weekend Bloomberg reported Goldman Sachs expects 10s to head to 2.5% in 2017, while last week former Fed chair Alan Greenspan said he thought rates were headed toward 5% – and that was before the election.

Jeff Gundlach, the CEO of Doubleline Capital and Wall Street’s “bond god” has added his voice to the bearish outlook for rates.

Barrons reports Gundlach says the rise in bond yields could take the US 10-year rate up to 6% over the next 5 years because president-elect Trump’s pro-business agenda is “unfriendly” to bonds.

US 10-year treasury rates (Reuters Eikon)

Not only does an increase in the deficit hurt Treasuries, Gundlach says “if nominal GDP pushes toward 4%, 5%, or even 6%, there is no way you are going to get bond yields to stay below 2%”.

Gundlach hasn’t yet decided what he thinks about the outlook for US stocks right now after the Trump win and rates rise, but it doesn’t sound positive.

“The structure of the US economy and the pricing of the stock market are predicated on 1.5% Treasury yields and zero short-term interest rates” he said.

That raises a lot of questions about valuation of stocks which the Fed said back in July are “vulnerable to rises in term premiums to more normal levels”.

Back in May Warren Buffett said “if interest rates normalise, we’ll look back and say stocks weren’t so cheap”

And that’s the big question for investors right now. The rally from the acute pessimism of last week’s lows has taken 10-year bonds to the highest levels since January, it’s seen the Dow make new record highs, but the broader S&P 500 is lagging a little.

Clearly traders are grappling with the same question about the overall market stock/bond trade-off under Trumponomics as Gundlach is.

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