10-Year Yields Topping 3% Would Punish Market: Investor

Interest rates may climb to 3% on 10-year Treasuries by next year as deficits and inflation rise under a Donald Trump presidency and that would hurt the housing market, said Jeffrey Gundlach, chief investment officer of DoubleLine Capital.

The effects would be felt across the U.S. economy, said Gundlach, who has called the president-elect’s policies bond unfriendly. The benchmark Treasuries are currently trading at close to 2.5%.

“We’re getting to the point where further rises in Treasuries, certainly above 3%, would start to have a real impact on market liquidity in corporate bonds and junk bonds,” Gundlach said during a webcast presentation on his DoubleLine Total Return Bond Fund. “Also, a 10-year Treasury above 3% in my view starts to bring into question some of the aspects of the stock market and of the housing market in particular.”

The Federal Reserve is expected to raise its fed funds rate by 25 basis points on Dec. 14 for the first time this year and only the second time since the 2008 financial crisis. After the meeting he will be looking for signs that Fed members are growing inclined to raise rates more aggressively in the next couple of years as the economy heats up.

The $58.3 billion DoubleLine Total Return Bond Fund, which invests mostly in mortgage-backed securities, returned 1.9% this year through Dec. 12. Investors pulled $1.4 billion from the fund in November, the Los Angeles-based firm said on Dec. 2, as rates climbed following Trump’s Nov. 8 win.

The average duration of holdings in the fund had been increased as rates have risen since July, while still holding debt with a shorter duration — and lower risk — than the benchmark Bloomberg Barclays U.S. Aggregate bond index.