The New Bond King: The Fed is “taking aim but not pulling the trigger,” CPI “returns to the 4s,” and the AI credit crisis resembles “the eve of the subprime crisis.”

The Federal Reserve holds steady, but the "New Bond King" Jeffrey Gundlach warns that real risks are lurking beneath the surface.

After the latest FOMC meeting, DoubleLine Capital founder and CIO Gundlach spoke in an exclusive interview with CNBC, bluntly stating that the Fed is in a "ready-aim-but-never-shoot" predicament, while issuing a triple warning: CPI is about to return to the "4 handle," AI-related credit markets are showing signals reminiscent of the eve of the 2006 subprime crisis, and the U.S. fiscal deficit is expanding at a staggering pace.

(Left: CNBC host Scott Wapner; Right: Jeffrey Gundlach)

Gundlach made it clear that based on his inflation model, US CPI will begin with "4" in the coming months, mainly driven by a sharp increase in energy prices, and that this situation is likely to persist for at least five months. It may only begin to ease due to base effects in next April’s report (released in May). Meanwhile, he noted that the large-scale bond issuances by AI and related companies are being shunned in the market, with a severe disconnect between investment grade ratings assigned by agencies and actual market pricing—an occurrence he likened to the trajectory of the ABX index prior to the 2006-2007 subprime crisis.

Strategically, Gundlach maintains his previous stance: 30% equities (favoring equal-weight S&P 500), 30% bonds (barbell strategy), 20% commodities, and 20% cash-like assets, and emphasized a bearish view on the market-cap-weighted S&P 500, due to its excessive concentration in the core "blast radius" of AI.

Fed’s “Information Accumulation” Argument: Ready but Not Pulling the Trigger

Gundlach was rather blunt in his overall assessment of Fed Chair Powell's press conference. He said the event was full of phrases like "looking out the window," and "assessing reality," with the core message simply being to “accumulate more information”—which reminded him of criticisms of the Fed nearly 20 years ago: always aiming, but never pulling the trigger.

He believes the Fed is currently behind the curve. The 2-year U.S. Treasury yield has climbed to 4.75%, whereas the federal funds rate remains at 4%, and long-end yields have already surpassed 5%. The market has already done much of the Fed’s tightening work for it. Gundlach stated bluntly that, given nominal GDP growth (approx. 3.4% real GDP plus about 3% inflation, nearly 6% nominal GDP) and continuing strength in commodity prices, the Fed should have raised rates and he expects a rate hike is highly likely in December.

Regarding the Fed Chair's comment at the press conference that “the widening of credit spreads is not concerning,” Gundlach believes this indicates the Fed is satisfied with the market’s self-tightening of financial conditions. However, he warned that this tightening is not coming from high-quality credit, but from widening spreads in lower-rated credit—a warning signal, not something to be celebrated.

CPI Returns to "4 Handle": Energy as the Core Driver

Gundlach’s view on inflation trends is rather clear. He said, his inflation model has long shown high accuracy and is highly dependent on energy prices, which have risen sharply this year.

Based on this model, he forecasts that the US CPI will begin with "4" in the coming months. As long as energy prices remain around current levels, this situation will last approximately five months, and will likely only ease due to base effects starting from next April’s data (released in May).

He also specifically pointed out that WTI crude has surpassed $100, and Brent crude as well. When accounting for transportation surcharges and other costs, the actual equivalent oil price is nearly $135/barrel, far above the headline price on commodity exchanges. The Bloomberg Commodity Index is now clearly above its 200-day moving average and in an uptrend, which further supports his view that inflation will persist.

AI Credit: Ratings Distorted, Feeling Like “The Eve of Subprime”

This is the most cautionary part of Gundlach’s remarks. He pointed out that AI and AI-related companies have recently issued bonds at a large scale, but the market’s reaction is worrying.

He cited two specific examples: SpaceX issued bonds with a BBB rating, yet the market immediately priced its spread at junk bond levels; Oracle issued a BBB- bond, but the market priced it as if it were a single-B company. This means there is a severe disconnect between the investment grade ratings provided by agencies and the credit quality actually recognized by the market.

Gundlach compared this phenomenon to the behavior of the ABX Index ahead of the 2006-2007 subprime crisis. He said that at the time, the market began losing confidence in BBB-rated subprime-related assets, and now, a similar crisis of rating credibility is occurring in private credit—especially for private credit assets held by insurance companies under private equity groups.

He stressed that this trend has already begun to accelerate and merits continuous monitoring. For now, credit spread widening has spread across multiple markets: emerging markets, certain segments of commercial mortgage-backed securities (CMBS), and investment-grade bonds are all experiencing varying degrees of spread expansion. The BBB-rated bank loan index has dropped about 18% since the beginning of the year, and this pressure cannot be ignored.

Fiscal Deficit: $500 Billion Burned in Two Months, Annualized Deficit Nearing 9% of GDP

Gundlach’s depiction of the U.S. fiscal situation is equally striking. He said U.S. national debt surpassed $40 trillion in August, and when he checked the debt clock recently, the debt had increased another $500 billion in just two months, reaching $40.5 trillion—an annualized deficit of around $3 trillion, close to 9% of GDP.

He pointed out that the percentage of deficit to GDP in the US has only topped 6% five times in history: the Civil War, World War I, World War II, the global financial crisis, and the COVID-19 pandemic. In this fiscal year, the US has already hit a 6% deficit in just two months, and the latest two months reached a 9% annualized level.

Gundlach said, the government’s unchecked borrowing, combined with the robust financing demand from AI companies, is exerting persistent upward pressure on interest rates. He also mentioned France’s fiscal situation is similarly worrisome—France’s debt-to-GDP ratio is high, 57% of its budget goes to social programs, and the poll-leading Marine Le Pen is even advocating a lower retirement age, which he finds “mind-boggling.”

Staying Clear of the AI "Blast Radius," Favoring Equal-Weight S&P

In terms of portfolio allocation, Gundlach maintains his previous framework and further explained his rationale:

Equities (30%): Allocated only to the equal-weight S&P 500, explicitly avoiding the market-cap-weighted S&P 500. The reason, he says, is that market-cap-weighted indices are overly concentrated in AI-related core companies, which are at the heart of what he describes as the "blast radius." He points out that recently, and year-to-date, the equal-weight S&P 500 has slightly outperformed the market-cap-weighted version.

Bonds (30%): Using a barbell strategy, allocating on one end to a domestic bond portfolio with almost no corporate credit exposure, high ratings, and mainly non-corporate bonds; on the other end, to local-currency-denominated emerging market bonds, reasoning that the dollar will continue to weaken, and FX conversion gains combined with higher coupons on EM bonds provide attractive total returns.

Commodities (20%): 15% in the Bloomberg Commodity Index, 5% in gold. He stated, every time gold drops $100, 1% is switched from the commodity index to gold, with the goal that if gold falls to $3,500, commodities and gold would each make up 10%.

Cash-like assets (20%): Not simply holding short-term Treasuries, but allocating to a well-managed, low-volatility portfolio with an average duration of about two years, targeting a yield of around 6.5%, a Sherman Ratio (yield/duration) above 3, meaning even if yields rise another 200 basis points, total returns would remain positive.

For long-term Treasuries, Gundlach said, they are worth allocating when the 10-year yield is above 5%, but as soon as it drops below 5%, he is no longer interested; nor will he open new positions if the 30-year yield falls below 5.4%.