The Fed held rates steady, but "New Bond King" Jeffrey Gundlach warns that the real risks are quietly building beneath the surface.
After the Fed's latest policy meeting concluded, Gundlach, founder and chief investment officer of DoubleLine Capital, sat down with CNBC for an exclusive interview, saying bluntly that the Fed has fallen into a trap of "aiming but never pulling the trigger." At the same time, he issued three warnings: CPI is about to return to the "4% range," the AI-related credit market is flashing signals reminiscent of the eve of the 2006 subprime crisis, and the U.S. fiscal deficit is ballooning at an alarming pace.
Gundlach made clear that based on his inflation model, U.S. CPI will begin with a "4" in the coming months, a forecast driven primarily by a sharp surge in energy prices. He expects this situation to persist for at least five months, only potentially easing by the April report of next year (published in May) due to base effects. At the same time, he pointed out that massive bond issuance by AI and related companies is meeting a cold reception from the market, with a severe disconnect between the investment-grade ratings assigned by rating agencies and actual market pricing. This phenomenon reminds him of the ABX index trajectory on the eve of the 2006-2007 subprime crisis.
On market strategy, Gundlach maintained his previous stance: 30% equities (favoring the equal-weighted S&P 500), 30% bonds (barbell strategy), 20% commodities, and 20% cash-like assets. He emphasized that he is bearish on the market-cap-weighted S&P 500 because it is overly concentrated in the core "blast radius" of AI.
Fed's "Accumulating Information" Theory: Ready but Not Firing
Gundlach was rather blunt in his overall assessment of Fed Chair Warsh's press conference. He said the conference was filled with rhetoric about "looking out the window" and "examining reality," with the core message being nothing more than continuing to "accumulate more information"—which reminded him of his criticism of the Fed nearly 20 years ago: always aiming, but never pulling the trigger.
He believes the Fed is now effectively behind the curve. The two-year Treasury yield has risen to 4.75%, while the federal funds rate remains at 4%, and long-end yields have already broken through 5%. The market has in effect done a considerable amount of the Fed's tightening work for it. Gundlach said bluntly that given nominal GDP growth (real GDP around 3.4% plus roughly 3% inflation, putting nominal GDP close to 6%) and persistently strengthening commodity prices, the Fed should be hiking rates. He expects a rate hike in December with high probability.
Regarding the Fed Chair's statement at the press conference that "widening credit spreads are not unsettling," Gundlach believes this shows the Fed is comfortable with the market tightening financial conditions on its own. But he warned that this tightening is not coming from high-quality credit, but rather from widening spreads on lower-rated credit. This is a signal worth being wary of, not one worth celebrating.
CPI Back to the "4% Range": Energy Is the Core Driver
Gundlach's judgment on the inflation trajectory is quite clear. He said his inflation model has long been highly accurate, relying heavily on energy prices, and energy prices have risen sharply this year.
Based on this model, he predicts U.S. CPI will begin with a "4" in the coming months, and as long as energy prices remain near current levels, this situation will persist for about five months. It may only begin to fade with the April data of next year (published in May) due to base effects.
He also specifically noted that WTI crude has exceeded $100, as has Brent. Taking into account costs such as transportation surcharges, the effective equivalent oil price is already close to $135 per barrel, far above the headline prices shown on commodity exchanges. The Bloomberg Commodity Index has now clearly risen above its 200-day moving average and is in an uptrend, further supporting his view on persistent inflation.
AI Credit: Rating Distortion, a Sense of "Subprime Eve"
This is the most cautionary part of Gundlach's remarks. He pointed out that AI and AI-related companies have recently issued bonds on a massive scale, but the bond market's reaction is concerning.
He cited two specific cases: SpaceX issued debt with a BBB rating, but the market immediately priced its spreads at junk bond levels; Oracle issued debt with a BBB- rating, but the market priced it as a single-B company. This means there is a serious disconnect between the investment-grade ratings given by rating agencies and the credit quality actually recognized by the market.
Gundlach compared this phenomenon to the ABX index trajectory on the eve of the 2006-2007 subprime crisis. He said that at the time, the market began to lose confidence in the ratings of BBB-rated subprime-related assets, and now, in the private credit space—especially private credit assets held by insurance companies owned by private equity firms—a similar crisis of rating credibility is emerging.
He emphasized that this trend has already begun to accelerate and is worth continued monitoring. Currently, widening credit spreads have spread to multiple markets: emerging markets, specific segments of commercial mortgage-backed securities (CMBS), and investment-grade bonds have all seen varying degrees of spread widening. The price of the BBB-rated bank loan index has fallen about 18% since the start of the year, and this pressure cannot be ignored.
Fiscal Deficit: $500 Billion Burned in Two Months, Annualized Deficit Rate Approaching 9% of GDP
Gundlach's description of the U.S. fiscal situation is equally startling. He said U.S. national debt broke through $40 trillion in August, and when he recently checked the debt clock website, he found that debt had increased by another $500 billion in just two months, reaching $40.5 trillion. That translates to an annualized deficit rate of about $3 trillion, equivalent to 9% of GDP.
He pointed out that in U.S. history, a deficit-to-GDP ratio of 6% has only occurred five times: the Civil War, World War I, World War II, the global financial crisis, and the COVID-19 pandemic. Yet the current fiscal year has already run a 6% deficit rate in just two months, and the most recent two months have reached an annualized level of 9%.
Gundlach said that the government's unrestrained borrowing, combined with the vigorous financing needs of AI companies, is putting sustained upward pressure on interest rates. He also mentioned that France's fiscal situation is equally concerning—France's debt-to-GDP ratio is high, 57% of its budget goes to social program spending, and Marine Le Pen, who leads in the polls, is even advocating lowering the retirement age, which he finds "astonishing."
Stay Away from AI's "Blast Radius," Favor Equal-Weighted S&P
On portfolio allocation, Gundlach maintained his previous framework and further elaborated on his logic:
Equities (30%): Only allocate to the equal-weighted S&P 500, explicitly avoiding the market-cap-weighted S&P 500. His reasoning is that the market-cap-weighted index is overly concentrated in AI-related core companies, which are at the center of what he describes as the "blast radius." He noted that the equal-weighted S&P 500 has recently and year-to-date slightly outperformed the market-cap-weighted version.
Bonds (30%): A barbell strategy, with one end allocated to a domestic bond portfolio with almost zero corporate credit exposure, high ratings, and primarily non-corporate debt; the other end allocated to local-currency-denominated emerging market bonds. The rationale is that the dollar will continue to weaken, and currency conversion gains combined with the higher coupons of emerging market bonds provide considerable total returns.
Commodities (20%): 15% allocated to the Bloomberg Commodity Index, 5% to gold. He said that every time gold falls by $100, he will shift 1% from the commodity index to gold, with the goal that if gold drops to $3,500, commodities and gold would each account for 10%.
Cash-like assets (20%): Not simply holding short-term Treasuries, but rather a well-managed low-volatility portfolio with a duration of about two years, targeting a yield of approximately 6.5%. The Sherman ratio (yield/duration) exceeds 3, meaning that even if rates rise another 200 basis points, total return would still be positive.
As for long-end U.S. Treasuries, Gundlach said they have allocation value when the 10-year yield is above 5%, but once it falls below 5%, he is no longer interested; he also would not initiate new positions when the 30-year yield is below 5.4%.
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