The Case of Continuing Low Yields

Jeffrey Gundlach of DoubleLine Funds has been an advocate of the idea that interest rates aren’t going to rise any time soon. He’s been saying that for several years, even after the consensus in the investment community seemed to agree that interest rates had to start rising. Proof of the consensus is in the futures markets, which are priced for the notion that interest rates will return to historic averages (which are well above today’s rates) in a fairly short time.

In this article, Gundlach focus on demographics, the aging of America. I’ve seen him give other presentations in which he also argued that the Fed will keep rates low because the federal government can’t afford to pay higher yields on its debt. The generally weak economy is another reason.

More retirees mean a shrinking workforce, leading to less spending, slower inflation and greater demand for low-risk, income-producing investments. RBC Capital Markets, one of the 22 dealers obligated to bid at U.S. Treasury auctions, says annual growth in the working age population will slow to 0.2 percent in the coming decade from 1.2 percent in the 10 years before the financial crisis. This helps explain why the best and brightest erred in calling for a bear market in U.S. bonds — and why benchmark Treasury yields may stay low for years to come, according to Gundlach.

“That’s one of the reasons why yields are not just going to explode on the upside,” Gundlach, who oversees $50 billion as the co-founder and chief executive officer of DoubleLine Capital LP, said in a May 7 interview with Tom Keene from Bloomberg’s headquarters in New York. “Part of this equation is the demand for income from the growing number of retirees.”