"Fear and loathing" best describes market sentiment toward risky assets today, a huge divergence in attitude from one year ago, prominent bond fund manager Jeffrey Gundlach said on Thursday.
The psychology among investors has changed since last summer, when people were willing to stomach volatility for income, said Gundlach, CEO and chief investment officer of DoubleLine Capital.
Today, it seems investors aren't interested in volatility at all, he said.
(Read more: Gundlach—bet on hated assets)
In turn, Gundlach is looking for clues as to what might move interest rates.
Gundlach said he expects the Federal Reserve will begin dialing back its bond-buying program in September, for example, which he thinks will cause stocks to fall and interest rates to "flush higher."
He also thinks a "period of volatility" will set in post-taper because there won't be this "safety net" to prop up the markets.
To Gundlach, the yield on the 10-year could go to 3.10 percent by year end.
To explain why he doesn't think it will likely go much higher, he drew comparisons to how rates rose in 1994: rates spiked following a sell-off (not unlike the sell-off in May-June), only to slow down for a few months and then gradually went higher due to a lack of interest. He thinks that's what's happening now, too.
There's plenty of yield right now in the bond market, Gundlach said, but not in Treasurys. The interest is in closed-end bond funds and mortgage REITs instead, which he said are trading at big discounts and pay juicy yields.
Looking forward, the economy would have to greatly improve and market sentiment would have to change for Gundlach to think the 10-year yield will move much higher.
(Watch: Gundlach on emerging markets)