'Bond King' Gundlach: "Rate Cuts Impossible... CPI Could Rise to 4%"

2-Year Treasury Yield Exceeds Fed Funds Rate
Market Already Pricing in Fed's Tight Policy
"DoubleLine Model Suggests CPI Could Reach 4%"
"Kevin Warsh Takes the Helm Amid Difficult Times"

Legendary bond investor Jeffrey Gundlach, CEO of DoubleLine Capital, has pushed back against expectations of interest rate cuts by the Federal Reserve (Fed). He warned that, in the aftermath of the Iran war, surging energy prices could drive the Consumer Price Index (CPI) up to the 4% range.

Reuters Yonhap News

In an interview with Fox News on the 17th (local time), CEO Gundlach stated, "People were expecting two rate cuts this year, but inflation has not responded at all." He added, "It is impossible to cut rates when the yield on the 2-year US Treasury is 50 basis points (1bp=0.01 percentage point) higher than the Fed funds rate."

Generally, the yield on the 2-year US Treasury reflects the market's expectations for the future path of the benchmark interest rate. The fact that the 2-year yield is currently higher than the Fed funds rate indicates that the market expects the Fed to keep rates elevated for an extended period.

CEO Gundlach expressed particular concern about inflation. He said, "The April CPI rose 3.8% year-on-year, marking the fastest increase since May 2023," and added, "According to the DoubleLine model, the next headline CPI will start with a '4'." This implies that DoubleLine Capital internally sees a possibility that the next CPI could rise into the 4% range.

On Wall Street, indicators for expected inflation have also been surging recently. The breakeven inflation rate (BEI), a metric used by market participants to gauge future inflation, has climbed to its highest level since 2022-2023. According to Fed data, the 5-year BEI, which reflects expected inflation over the next five years, has recently risen to about 2.7%.

Yonhap News Agency

CEO Gundlach commented on Kevin Warsh, the next Fed chair, saying, "He has taken on the role at a very difficult time." He cited several factors: the prolonged Iran war driving up international oil prices, these higher prices starting to be fully reflected in US inflation data, and US President Donald Trump demanding rate cuts.

Nevertheless, he observed that the US stock market "remains surprisingly strong even amid chaos," and diagnosed, "The market surges when the Fed does nothing about the inflation problem."

He explained, "Over the past three years, I have maintained a highly optimistic outlook on commodities; however, with bond yields in negative territory and prediction markets shifting attention to Bitcoin and other speculative assets, investors have had few alternatives outside of stocks."

However, he cautioned that there are currently risk factors embedded in the stock market. CEO Gundlach stated, "The market is very expensive and speculative, but corporate earnings continue to significantly exceed expectations," noting that "this is fueling the speculative fervor."

He also reiterated concerns about the private credit market. When asked if he is worried about private lending, CEO Gundlach replied, "I am definitely concerned," explaining, "There seems to be some structural characteristic in the private credit market that always requires new investors." He added, "This may be due to the greed of sponsors, as they always want more assets under management (AUM)."

This content was produced with the assistance of AI translation services.