Video Reports

Embed this video

Copy Code

Link to this video

Get LinkEmbedLicenseRecommend (-)Print
Bookmark and Share

By Jeremy Glaser | 08-09-2011 12:17 PM

Gundlach: Treasuries Could Keep Rallying

Treasury yields could head even lower if deficit-reduction measures further slow U.S. growth, according to DoubleLine's Jeffrey Gundlach.

Jeremy Glaser: For Morningstar, I am Jeremy Glaser. The Treasury market has been under laser focus during the recent market turmoil. I'm very pleased to be joined today by Jeffrey Gundlach. He's the CEO and chief investment officer of DoubleLine Capital, and we'll take look at the markets.

Jeffrey, thank you so much for taking the time today.

Jeffrey Gundlach: Glad to be here.

Glaser: So my first question for you is this Standard & Poor's downgrade of U.S. sovereign debt. What's your take on that? Is this something that really is going to have a major impact on bond investing?

Gundlach: The downgrade of the U.S. Treasuries by S&P is just silly in my opinion. The rating agency's job is historically to opine on the payback ability of various entities, and one thing seems fairly clear to me that the United States certainly has the ability to pay back its debts. Obviously, Treasury Department can just run the printing press if it comes to that.

So there's no reason whatsoever to downgrade the U.S. Treasury. What S&P has really done I think is to opine on the value of the dollars on which you're paid back, which isn't really the firm's job. Its job isn't to make forecast about currencies or commodities. It's job is to talk about the probability of payback, and the probability of payback is 100%.

So what you've really had is downgrade of the dollar. You could also say that S&P thinks there might be a voluntary default, based upon politicians' attitudes as revealed in the shenanigans with the debt ceiling, but I think that that's just incredibly unlikely. What it really kind of means though, is it's a signpost on the way toward building momentum, toward potentially dealing with the deficit problems that we've all talked so much about during the last several quarters.

There's been movement in that direction, kind of incrementally, but movement in that direction ever since the election last fall when the Tea Party folks were voted in, in the sweep of Congress. That was the first sign of society had an awareness of the deficit problem and was thinking about doing something about it.

Then, you've had this downgrade, which also is putting extra pressure on the politicians, and of course the whole debt-ceiling shenanigans showed at least a respect for the voters' attitude about deficit worries, and if you're going to address the deficit problem even incrementally, low Treasury bond yields make tremendous sense, because addressing the deficit fairly clearly leads to weaker economic growth.

Already, we have $350 billion of fiscal drag coming our way in 2012 if policies are not changed with the sunsetting of tax cuts from the Bush era and also from the payroll tax reduction that was put in place at year-end 2010. $350 billion of fiscal drag is a lot, particularly when we're living with de minimis GDP growth to begin with, in the first half of 2011. Let's remember, the first half of 2011 GDP growth was a beneficiary of stimulus.

So absent the stimulus, GDP growth would be negative already, and we have fiscal drag coming. So that's really what's happening here as the markets are building in terms of their respect for the potential weakness of the U.S. and the global economy.

Read Full Transcript
{0}-{1} of {2} Comments
{0}-{1} of {2} Comment
  • This post has been reported.
  • Comment removed for violation of Terms of Use ({0})
    Please create a username to comment on this article