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Global bond yields to rise as investors see fiscal expansion on horizon - Gundlach

| TOKYO, Sept 14

TOKYO, Sept 14 The long-term decline in global bond yields is over and investors are watching out for a likely fiscal expansion in the world's major economies where monetary stimulus has reached its limits, Jeffrey Gundlach, chief executive officer of DoubleLine Capital, said on Tuesday.

Speaking at an investment conference held by Mizuho Financial Group in Tokyo, Gundlach also said Japan's experiment with negative interest rates showed to the world that the policy does not work.

"I have learned from my 35 years in the investment business that when people say something will never happen, it means, it's about to happen," said Gundlach, challenging many investors' belief that interest rates can never rise because of the stagnation in global economic growth.

"If you watch very carefully, interest rates have already secretly started to rise."

Over the past week, long-term interest rates in Japan, Europe, and the United States rose between a quarter and a third of a percentage point.

Germany's benchmark 10-year Bund yield climbed into positive territory last Friday for the first time since June's Brexit vote. In Japan, the 10-year JGB yield was about to emerge from sub-zero territory, rising to minus 0.010 percent on Monday. The yield on the 10-year U.S. Treasury note stood at 1.672 percent on Monday.

Gundlach said it became clear that negative interest rates, adopted by the European Central Bank and the Bank of Japan, have not had the effect that policymakers wanted on investors.

"The Japanese yen rallied since rates went negative in Japan. The Nikkei (stock average) has gone nowhere, and the economy has not improved," said Gundlach, noting that the situation is the same in Europe as negative rates spur incremental saving instead of consumption.

Gundlach said Japanese bank stocks have underperformed the broader market since the BOJ cut interest rates to below zero because investors think banks cannot survive many years of negative rates. And destroying the financial system is no way to stimulate the economy, he said.

"I think central bankers are learning this fact with accumulation of the evidence of markets and will abandon negative interest rates in favor of another form of stimulus -- fiscal stimulus, some call it helicopter money. And I think it will come."

That prospect of fiscal stimulus has been quietly boosting inflation expectations since June, Gundlach said, as investors are starting to sense that inflation is coming in future years. "This is very bond unfriendly. If you own bonds, fiscal stimulus is not positive."

At a summit this month, G20 leaders repeated their view that monetary policy alone could not create balanced economic growth. Japan has adopted fiscal stimulus while leaders from southern Europe last week called for action to boost flagging growth in the bloc.

DoubleLine had more than $100 billion in assets under management as of June 1. (Editing by Hugh Lawson)

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