Gundlach Says Yellen Remarks to Be Dovish as Treasury Bid Soars

  • Fed will hold off in June if odds below 50%, Gundlach says
  • Yellen to speak at Harvard University at 1:15 p.m. local time

The Dangers of Yellen Speaking Right Before Memorial Day

Jeffrey Gundlach said he expects Federal Reserve Chair Janet Yellen will “be dovish” in an appearance Friday.

The chief executive of DoubleLine Capital LP in Los Angeles said the Fed will refrain from raising interest rates in June unless traders in the futures market assign odds of at least 50 percent to the move. Futures contracts currently show a 28 percent probability. Bidding surged at Treasury note auctions this week, suggesting the threat of higher rates isn’t deterring investors.

Yellen will be able to use her appearance at Harvard University at 1:15 p.m. local time to repeat her view from April that the Fed should be cautious or she may support other policy makers who have spoken in favor of higher rates. Gundlach said she will “be dovish,” and temper expectations for a rapid series of interest-rate increases.

“Even if they’re going to raise interest rates, they’re going to be gradual,” said Hajime Nagata, a bond investor in Tokyo at Diam Co., which manages $157.9 billion. “Overseas demand should be strong.”

Treasuries were little changed Friday, with the benchmark 10-year note yield at 1.83 percent as of 6:45 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in May 2026 was 98 6/32. The securities are little changed this month, having returned 3.1 percent this year, based on Bloomberg World Bond Indexes.

Inflation Looms

Gundlach also said inflation is coming, though it’s a long way away, speaking a presentation in Beverly Hills, California, Thursday. His DoubleLine Core Fixed Income Fund returned 3.5 percent this year, beating 66 percent of its peers, data compiled by Bloomberg show.

QuickTake The Fed Lifts Off

To see how Yellen may keep traders from heading home early, click here.

Fed officials including the presidents of the central bank’s regional arms in San Francisco, Boston and Philadelphia have all spoken this month in support of higher interest rates. A move would add to the Fed’s quarter-point increase in December.

The comments haven’t been enough to keep investors away from Treasuries.

Investor demand at a five-year auction Wednesday was so strong that primary dealers, the Wall Street firms that make a market in U.S. debt, were only able to purchase 21.8 percent of the securities, a record low for the maturity, based on Treasury Department data going back to 2003. 

A two-year auction Tuesday also left the firms with the smallest award on record.

‘Under Pressure’

Yellen “will be the key for the near-term outlook,” said Jan von Gerich, chief strategist at Nordea Bank AB in Helsinki. “The re-pricing of Fed hikes is not complete yet, which will keep Treasuries under pressure for now.”

Japanese fund managers bought overseas debt for a sixth straight week in the period ended May 20, the Ministry of Finance reported Thursday.

Trading in Treasuries is scheduled to close at 2 p.m. Friday in New York and stay shut worldwide May 30 in observance of Memorial Day in the U.S. and the Spring Bank Holiday in the U.K., according to the Securities Industry and Financial Markets Association.

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