Gundlach: Expect 2026 Rate Hikes, Avoid Long-Term Bonds

Jeffrey Gundlach, chief executive of DoubleLine, laid out his outlook during a recent webinar. He warned investors to avoid long-term government bonds in developed markets, predicted the Federal Reserve would raise rather than cut rates in 2026, and recommended shifting allocations into international and emerging-market assets as raw inflation approaches about 6.5%.

Gundlach described structural changes in fixed income after a long period of near-zero rates and pandemic-era stimulus. He highlighted an anomaly in the Bloomberg U.S. Aggregate Bond Index: the 10- and 20-year yield-to-worst averages sit within one basis point of each other, the 30-year historical average is about 4.05%, and the aggregate yield is roughly 4.78%. He noted that investors who bought 30-year Treasuries at about 1% in 2020 suffered capital losses exceeding 50% in 2022.

He identified the two-year Treasury as a key indicator for Federal Reserve policy, saying “I always say that the Fed follows the two-year Treasury.” Gundlach argued movements in the two-year tend to precede changes in the federal funds rate and recalled that policymakers lagged the curve during 2022.

On inflation, Gundlach rejected trimmed or core measures that exclude outliers and described metrics such as the Dallas Fed’s Trimmed Mean PCE as “cynical exercises.” He pointed to raw import and export price indexes that he said show inflation near 6.5% and added: “At this point, I think there’s no chance that they’re gonna cut rates in 2026. In fact, if I had to bet, I would bet they would hike them.”

He warned that equity markets show high concentration and elevated valuations. Gundlach noted the Shiller cyclically adjusted price-to-earnings ratio has climbed to historic highs and that 10 large technology and artificial intelligence companies account for about 41% of the S&P 500 by market capitalization. He said that concentration has begun to unwind.

Gundlach recommended a geographic rotation away from top-heavy U.S. technology indexes and toward international equities, emerging-market stocks and local-currency emerging-market debt. He cited a weakening trade-weighted U.S. dollar and said those assets have outperformed domestic benchmarks over the past 18 months.

His guidance for investors was to avoid long-duration government bonds in developed countries, monitor the two-year Treasury as a barometer of Fed action, treat raw inflation readings as a primary input and shift capital into diversified, income-generating assets outside the concentrated U.S. tech complex.