Jeffrey Gundlach is talking about an “old school” Federal Reserve. The “Bond King” (as he is known), is in charge of $101b USD, and believes US economic data will see the Fed raise interest rates at their upcoming March 14-15 meeting. This is not a controversial view. Rather; the real issue is, is that he doesn’t expect it to end there.

This begs the question… Could we face another 1994?

Gundlach is CEO of DoubleLine Capital, and his recent comments state that the Fed will raise rates sequentially until “something breaks”. But what is that “something”?

Will it be the bond market? Will it be the US economy (ie recession)? Or will it be both?

The Fed had spoken last week about “animal spirits” being “unleashed”, and this is in part due to President Trump’s big spending fiscal agenda at time when the economy is at full employment. Business confidence has already risen, and this looks set to continue. A booming business community is good for stocks, but it also brings with it inflation. Inflation and long term bonds don’t match… unless you own TIPs (US Treasury inflation linked bonds). Gundlach of course owns these. He also owns gold, and is possibly some short positions in German Bunds.

Is Gundlach positioning for a 1994 type event?

1994 was the year that $1.5 trillion USD was wiped off the bond market, not because of Credit Default Swaps and sub-prime mortgages, but because of interest rate moves and carry trades.

In 1994, the US had just recorded 34 months of economic expansion. Alan Greenspan presided over the Fed, bond yields were at historic lows, inflation wasn’t too much of an issue. But in a short period of time US growth picked up, and commodity prices rose strongly. Greenspan upped short term rates from 3 to 3.25%, which pushed 30 year Treasury yields from 6.2% to 7.75%. This had a knock on effect around the world. Hedge funds were caught wrong footed, and were punished in the Eurobond market. By the end of it all, bonds shed trillions of dollars.

Greenspan is no longer at the Fed, and if anything Yellen seems far more cautious and trepid in her decision making. While much is written about the great Bond market rout in 1994, the question is whether Gundlach believes in history repeating.