Gundlach says rate cuts are a virtual certainty but he's still bearish on the long bond

Jeffrey Gundlach, CEO of DoubleLine Capital, now anticipates three Federal Reserve rate cuts this year, citing the 2-year Treasury yield's significant discount to the Fed funds rate as a key indicator. He forecasts a softer dollar, a steeper Treasury curve with the 2s/30s spread potentially widening to 150 basis points, and increased short-term bond issuance due to lower tax revenues. Gundlach is positive on equities, particularly international markets benefiting from a weaker dollar, and recommends gold.

Analysis

Jeffrey Gundlach of DoubleLine Capital has intensified his dovish outlook, now forecasting three Federal Reserve rate cuts this year based on the 2-year Treasury yield trading approximately 70 basis points below the Fed funds rate—a spread he views as a historically reliable precursor to Fed easing. He dismisses near-term inflation concerns, arguing the Fed will look through tariff impacts and citing that key metrics like M2 money supply growth and commodity prices are not signaling inflationary pressure. This macroeconomic view translates into a specific set of market expectations: a steepening of the U.S. Treasury curve, with the 2s/30s spread potentially widening from 110 to 150 basis points, which informs his bearish stance on the long bond (BX:TMUBMUSD30Y). Consequently, he anticipates a softening U.S. dollar (DXY), which supports a bullish bias towards equities, particularly in international markets that would benefit from favorable currency translation. The strategy is further bolstered by an explicit recommendation for gold (GC00), which he believes is positioned to gain from declining rates, a weaker dollar, and positive technical trends.

Key Decisions for Investors

• Consider implementing yield curve steepener trades, such as long positions in 2-year Treasuries (BX:TMUBMUSD02Y) against short positions in 30-year Treasuries (BX:TMUBMUSD30Y), to capitalize on the forecasted spread widening to 150 basis points.
• Evaluate overweighting international equities relative to U.S. stocks, as a weakening dollar (DXY) would enhance returns from foreign assets.
• Assess initiating or increasing allocations to gold (GC00) as a strategic holding, given the favorable outlook based on falling real rates and a depreciating dollar.
• Investors should closely monitor the spread between the 2-year Treasury yield and the Fed funds rate as a primary leading indicator for future monetary policy adjustments.