Jeffrey Gundlach speaks at the 24th annual Sohn Investment Conference in New York, May 6, 2019.
Adam Jeffery | CNBC
Jeffrey Gundlach, CEO of DoubleLine Capital, said Thursday that rates could rise if Republicans ultimately control the House of Representatives, securing a government trifecta that gives newly elected President Donald Trump a free hand to spend as he wants.
Gundlach, a well-known fixed income investor whose firm manages more than $96 billion, believes higher government spending would require more borrowing through government bond issuance, putting upward pressure on bond yields.
“If the House goes to the Republicans, there will be a lot of debt, there will be higher interest rates in the long run, and it will be interesting to see how the Fed responds to that,” Gundlach said on CNBC’s. Closing bell.”
The race for control of the House of Representatives is deadlocked on Thursday after Republicans secured their new majority in the Senate. The Federal Reserve cut interest rates on Thursday, and traders expect the central bank to cut again in December and several times in 2025.
Notable investors like Gundlach have expressed concerns about the challenging budget situation. The 2024 budget year just ended with the government running a budget deficit of more than $1.8 trillion, of which more than $1.1 trillion was dedicated solely to paying the financing costs of the $36 trillion U.S. debt.
“Trump says he’s going to cut taxes… he’s very pro-cyclical,” Gundlach said. “So it seems to me that there will be some pressure on interest rates, and especially over the longer term. I think this election outcome will have very significant consequences.”
If the Trump administration extends the 2017 tax cuts or implements new cuts, it could significantly increase the national debt in coming years, further worsening an already problematic fiscal picture.
Still, Gundlach, who had predicted a US recession, said Trump’s presidency makes such an economic downturn less likely.
“I think it’s right to view Trump’s victory as a way to significantly reduce the chances of a near-term recession,” Gundlach said. “Certainly, the likelihood of a recession diminishes if this type of agenda is promoted in plain English by Mr. Trump for the past three months.”