GUNDLACH: I saw something in the bond market I'd never seen before (TLT, TLO)

Thomson Reuters

US bond yields are historically low.

Last week, the yields on 10- and 30-year bonds fell to record lows.

Yields fall when bond prices rise amid strong buying by investors. And the price gains for bonds this year have given investors the biggest returns for a comparable period since 1995, according to Bloomberg.

Because the US remains the strongest developed market with positive-yielding bonds across the board, the hunt for yield is sending those yields down to all-time lows.

DoubleLine Funds CEO Jeff Gundlach said on Tuesday that the combination of record-low yields and "talking heads" recommending Treasurys for the first time was the "worst setup" he had seen in his career.

But as luck would have it, Gundlach said during a client conference call, the market agreed that yields were unsustainably low, as they bounced from the record depths.

Gundlach forecast that the 10-year yield would rise to 1.7% and only return to 2% next year. It was up 7 basis points to 1.507% on Tuesday.

"I still believe, and more strongly than ever, that we're looking at a long-term bottoming process in interest rates here," he said.

DoubleLine's Core Fixed Income Fund, which is composed of 26.7% government bonds, has returned about 5% this year.

Amid the "mass psychosis" for yield, Gundlach cautioned against speculating in the Treasury market, where bonds are being sold with the lowest yields of all time. A better bet would be in the wheat market, for example, where investors can quickly earn a return north of 10% if they're right.

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