DoubleLine Capital CEO Jeffrey Gundlach isn’t taking big risks in the bond market these days, particularly as the Federal Reserve tries to figure out its next rate move. The central bank opted to keep the federal funds rate at a range of 3.5% to 3.75% on Wednesday, although three policy members dissented in favor of raising rates by a quarter percentage point. However, if Chairman Kevin Warsh wants to reach 2% inflation, the Fed is going to have to increase rates , Gundlach said. In fact, reaching that inflation target could take a “couple of years,” he said in an interview with CNBC’s ” Closing Bell .” In this environment, Gundlach is being very selective. “The market for corporate credit is definitely softening — not so much in the investment grade area and not in every sector — but there have been great movements wider in spreads for a lot of these AI names and other technology names,” the bond investor said. He’s staying very high in quality, specifically BBB-rated bonds and higher. He would perhaps add some BB-rated assets in the high-yield market but cautions investors to stay out of the C category. “Investors have to be really seriously thinking about what is the credit risk, what is the default risk in the triple C part of the junk bond market and the bank loan market,” Gundlach said. Within bank loans, CCC-rated names have widened very significantly to BB names, he pointed out. “That’s usually a sign that something is going wrong,” he said. Gundlach is also not investing in the long-end of the yield curve, and instead is focusing on the two- to seven-year area. After the Fed meeting, the 30-year Treasury yield jumped above 5.2% , a level not seen since 2007. Gundlach thinks the rate on the long end of the curve could move up to the “mid-5s” before the next Fed news conference in September. Bond yields move inversely to prices. Government debt and the shortfalls in the Social Security trust fund, as well as the “monstrous deals” from artificial intelligence companies, are among the reasons for the move higher in long-term rates. “Interest rates are going to keep rising unless there is action on the deficit and some movement towards a real decline in the inflation rate,” Gundlach said.
