(Bloomberg) -- Jeffrey Gundlach sees “rough waters” ahead for financial markets as the Federal Reserve is poised to accelerate the end of quantitative easing and then turn toward raising interest rates. 

During a webcast Tuesday about his DoubleLine Total Return Bond Fund, the billionaire money manager advised keeping an eye on the high-yield bond market, a potential “canary in the coal mine” for risk assets.

With debt levels having surged during the pandemic, the increase in borrowing costs is poised to create headwinds for economic growth, and trouble could emerge when short-term rates surpass 1%, Gundlach said. Two-year yields are currently about 0.69%. 

The bond market already is reflecting signs of difficulty ahead, with the yield curve flattening. Gundlach also said that the historically low level of yields across the curve today makes this flattening a doubly powerful signal of concern.

Gundlach, 62, said the reason why Fed Chair Jerome Powell characterizes the economy as strong, but not strong enough to allow for a rate hike at this point, is that the underlying condition is in fact weak -- artificially propped up by an unprecedented degree of stimulus.

Here are some other takeaways from Gundlach’s remarks:

  • He focused heavily on inflation, saying the annual pace of gains in the consumer price index could hit 7% in the next month or two. He ran through numerous inflation measures and pointed out that shelter costs have climbed significantly. He also said it’s possible that the CPI inflation gauge won’t drop below 4% throughout 2022.
  • Markets could face more volatility now that the Fed has said it might quicken its tapering program.
  • Gundlach reiterated that he bought European stocks for the first time in 12 years, which he disclosed a few months ago. He still owns some of those and they’ve done just OK until recently. He didn’t own emerging-markets equities, though he envisioned a scenario when they might outperform U.S. firms. “We’re looking for major opportunities” and emerging markets could be one over the next few years, he said.
  • The dollar has been in structural decline since 1985, he said, reiterating that the twin-deficit problem (that’s the current-account gap and the federal budget deficit) will cause the greenback to fall over time, which bodes well for emerging markets.
  • Gundlach said he’s not sure “it’s the greatest time to buy commodities” given how much their prices have been rising. And for preservation of capital, he recommended a short-duration bond fund.
  • He said he last bought gold, personally, in 2018 and that he likes it as a long-term hold.

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(Updates with gold investment in final bullet point.)

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