Gundlach Says How Fed Is Ending Easing Is ‘Big Mistake’

DoubleLine Capital LP’s Jeffrey Gundlach said the U.S. Federal Reserve is making a “big mistake” in the way it ends its unprecedented asset-purchase program.

“We thought the Fed wouldn’t walk away from QE,” or quantitative easing, and would buy securities until targeted yields were reached like in Japan and Europe, Gundlach said today during a webcast for investors. Instead, the central bank is opting for a “seat of the pants” way of handling policy, said the manager, whose firm is based in Los Angeles.

Top bond managers from Gundlach to Bill Gross have seen their funds shrink after Fed Reserve Chairman Ben S. Bernanke raised the possibility in May that the central bank would begin scaling back its bond purchases. The comment sent bond prices lower and yields higher, prompting clients to pull money out of their funds. While both investors in June predicted that bonds would rebound, they continued to fall.

“I have never liked QE, and think it is a poor replacement for sound fiscal policy,” Gundlach said in an e-mail. “Having embarked on QE, the Fed ushered in a new regime of dealing with the fiscal problems underlying the U.S. economy. Ending QE would allow the fiscal problems to reemerge.”

The yield on 10-year Treasuries has surged 1.33 percentage points to 2.96 percent since the beginning of May, pushing up borrowing costs for homeowners and consumers and fueling a flight of capital from emerging markets. The yield won’t fall below 2.7 percent any time soon, Gundlach said today, unless there’s a catalyst that drives up bond prices, such as a crisis in emerging markets.

Crisis Potential

Gundlach, citing comments by Ray Dalio, founder of $145 billion hedge-fund firm Bridgewater Associates LP, that the next major financial crisis may come from an emerging-market country, said India is the most likely candidate to trigger such a crisis. The country is most vulnerable because it relies too much on outside capital to finance its budget deficit. China and Russia, by contrast, are relatively insulated, Gundlach said.

Gundlach’s $36 billion DoubleLine Total Return Bond Fund has had three straight months of withdrawals, including $1.1 billion in August, according to estimates from research firm Morningstar Inc. The fund fell 1.2 percent this year through yesterday, putting it ahead of 86 percent of rivals, according to data compiled by Bloomberg.

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