December 10, 2014 / 2:11 AM / 6 years ago

Gundlach says benchmark 10-year Treasury yield could fall to 1 percent

NEW YORK (Reuters) - Jeffrey Gundlach, who correctly predicted government debt yields would plunge this year, said in an interview on Tuesday there is a possibility that yields on the benchmark 10-year Treasury note could drop to 1 percent in 2015.

Jeffrey Gundlach, chief executive and chief investment officer of DoubleLine Capital, speaks at the Sohn Investment Conference in New York, May 5, 2014. REUTERS/Eduardo Munoz

“The 10-year Treasury could join the Europeans and go to 1 percent. Why not? The European rates are at 1 percent. France is below 1 percent right now,” Gundlach said.

Gundlach, who co-founded DoubleLine Capital in December 2009, noted foreign demand for U.S. Treasuries has grown as yields on German and other European government bonds continue to fall.

The benchmark 10-year U.S. Treasury yield is running more than 1.55 percentage points above the yield on 10-year German Bunds.

“What’s really an emergency level is the negative yield on the German two-year,” Gundlach added. “When you get yields at negative, basically people are so afraid that they are willing to pay you for the safekeeping of their principal.”

Gundlach also said a continued plunge in oil prices would give even more fuel for a bond rally. “If oil goes to $40, then the 10-year could be going to 1 percent,” Gundlach said on a webcast late Tuesday. “The downward momentum on oil has likely found phase 2.” He added: “Oil will find a bottom when it starts going up.”

Gundlach said: “If oil goes to $40, something is very wrong with the world.” Brent crude, which has fallen more than 40 percent in the last six months, slipped to a five-year low on Tuesday.

“I still believe that there is a danger of repeat of a Treasury meltup that 2014 did end up bringing, particularly into the crescendo of October 15,” Gundlach said. “If something can’t go up, it has to go down. Yields can’t seem to go up. They might go down. And if they go down any amount again, if the 10-year goes below 2 percent, even below 2.20 percent, that’s the line in the sand I am talking about.”

DoubleLine said it would launch the DoubleLine Long Duration Total Return Bond Fund to investors on Monday. The new fund will invest primarily in agency mortgage-backed securities with an average effective duration of at least 10 years.

Duration is a bond’s sensitivity to interest rate fluctuations, and going longer on duration is an investment strategy when rates are expected to remain low or drop further.

Reporting By Jennifer Ablan; Editing by Meredith Mazzilli and Jonathan Oatis

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