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Jeffrey Gundlach's peculiar predictions

Investment guru Jeffrey Gundlach has a novel take on where US Treasury yields are heading in 2015.

As usual, Jeffrey Gundlach "has an idiosyncratic view of where markets are headed in 2015", says Jonathan R. Laing in Barron's. His predictions may be peculiar, but they have a habit of being accurate.

Last year, for instance, most people expected US Treasury yields to rise (reflecting falling prices). Gundlach said they would fall and he was right.

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This year they will keep falling, he says, even although the Fed is set to begin raising short-term interest rates. Why? Because deflationary forces are at work in the shaky global economy.

Commodity prices have returned to 2009 levels, signalling that "something is obviously very wrong" with global growth. China and emerging markets are slowing. Russia is a mess, and the sinking oil price raises the risk of it or Iran being destabilised.

A slowing economy, and excess capacity, will also be deflationary for the US economy, where the 3% annual growth that forecasters are expecting may prove optimistic. That suggests US equities could struggle.

Tanking oil prices will reinforce this deflationary trend. Don't expect a fast recovery. When a market has shown "extraordinary stability" for years oil hovered around $90 a barrel for five years it undergoes a "catastrophic crash prices usually go down a lot harder and stay down a lot longer than people think is possible". This will wreak havoc on US capital spending and the junk-bond market, given the level of debt in the energy sector.

Foreigners, who stepped in when the Fed stopped buying bonds with printed money, will prop up US bonds, attracted by the rising US dollar, and America's solid macroeconomic prospects compared to Europe and Japan.

The upshot? The ten-year Treasury yield, now around 2%, could fall below the modern-era low of 1.38% hit in 2012 a stark contrast to the consensus year-end forecast of 3.24%.

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