December 14, 2016 / 10:32 PM / 7 months ago

Gundlach: Fed did right thing but caught bond market 'off guard'

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NEW YORK, Dec 14 (Reuters) - The U.S. Federal Reserve's decision on Wednesday to raise rates by a quarter point and to signal a faster pace of increases in 2017 was reasonable, according to leading bond investor Jeffrey Gundlach, given growing inflationary pressures and U.S. President-elect Donald Trump's expected stimulus plans.

"The Fed did the right thing," Gundlach, the chief executive of DoubleLine Capital, said in a telephone interview. "They had to change something because of the inflation indicators. You cannot say, 'We are going to dust off the statement from March'."

Gundlach, who oversees $106 billion at Los Angeles-based DoubleLine, said the bond market was caught "off guard" after the Federal Open Market Committee said it was expecting to raise rates three times in 2017, an increase from the Federal Reserve's September meeting at which the committee said it foresaw two increases.

"The guidance is that the Fed could go three times next year - that is the big news," Gundlach said. The U.S. central bank could raise interest rates three times in 2017 "if the Consumer Price Index headline prints above 3 percent," he added.

Shorter-dated U.S. Treasury yields rose to their highest point in more than five years.

Yields on two-year Treasury notes rose to their highest level since August 2009, while three-year yields hit their highest since May 2010 and five-year yields rose to their highest since May 2011.

Gundlach, known on Wall Street as the "Bond King," went "maximum negative" on Treasuries on July 6 when the yield on the benchmark 10-year Treasury note hit 1.32 percent. On Wednesday, the yield on the 10-year Treasury note closed around 2.57 percent.

U.S. stocks fell the most in two months following the Fed's decision, which Gundlach blamed on the market being "overbought."

"It went up massively and now it is coming down from those levels," he said.

Gundlach told Reuters on Tuesday that a U.S. 10-year Treasury note yield above 3 percent will harm the stock-market rally and housing market.

"I think above 3 percent is a problem," he said On Tuesday. "If the 10-year goes above 3 percent, you would also have to say unequivocally you have seen the end of the bond bull market." (Reporting By Jennifer Ablan; Editing by Bill Rigby)

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