NEW YORK Jeffrey Gundlach, head of DoubleLine Capital LP, said Wednesday that the U.S. Federal Reserve is likely to reduce its bond purchases later this year and touted long-term Treasuries as a strong investment.
"I think that the Fed is going to reduce their bond purchases later this year," Gundlach told cable television network CNBC.
Gundlach, the chief executive and chief investment officer of the Los Angeles-based DoubleLine, said that the central bank has less incentive to stimulate the U.S. economy since the budget deficit is smaller than it was a year ago.
The U.S. budget deficit widened in May to $139 billion, but the total $626 billion deficit was still 26 percent lower than it was in May 2012.
The Fed is buying $85 billion in Treasuries and agency mortgage securities per month in an effort to spur hiring and lower long-term borrowing costs.
The central bank will release a policy statement at 2 p.m. which will sum up policymakers' views on the economic outlook and shed light on when the Fed might ease its stimulus.
Despite his prediction that the Fed will reduce its bond-buying, Gundlach said the central bank could eventually increase its purchases if economic data weakens. "This program is not going away," he said.
Fed Chairman Ben Bernanke triggered a wide selloff in the bond market on May 22 when he told Congress that the central bank could reduce its bond-buying this year if the U.S. economy looked set to maintain momentum.
Gundlach's flagship DoubleLine Total Return Bond Fund (DBLTX.O) has earned a return of 1.24 percent so far this year, whereas the Barclays U.S. Aggregate Bond Total Return index is down 1.12 percent, according to Lipper.
The fund, which has over $40 billion in assets, has earned a three-year annualized return of 9.72 percent, more than double the 4.29 percent return of the Barclays index over that period.
Gundlach said that interest rates are going to start falling, and added that long-term Treasuries are going to be "the most successful investment" in the near term since there are no signs of inflation.
"The one place that you're likely to make money in the next several weeks maybe couple of months is actually, believe it or not, the most hated asset class on the planet, long-term US government bonds," he said.
Gundlach, who said in an investor webcast earlier this month that it was a "horrible time to be exiting bonds," told CNBC that the bond market is nearing a rally.
"I think that what we're looking at is a bond market rally that's going to start fairly quickly," he said.
(Reporting by Sam Forgione; Editing by Chizu Nomiyama)