Billionaire bond investor Jeffrey Gundlach has sounded an economic warning bell as the 10-year Treasury yield dropped below a crucial 4% threshold. This significant shift in the bond market, occurring in the wake of the Federal Reserve’s indication of potential interest rate cuts next year, suggests deeper economic implications according to the bond king.
On Thursday, the 10-year Treasury rate experienced a sharp decline, plunging over 17 basis points to slightly above 4%. Gundlach, the founder of DoubleLine, had previously highlighted the significance of this rate falling below 4% in a CNBC interview. Describing it as akin to a “fire alarm” for the economy, Gundlach’s predictions seem to be unfolding as the rate further dropped to 3.9%.
Gundlach forecasts a continued decrease in the 10-year yield, anticipating it to reach the “low threes” in 2024. This prediction aligns with his belief in an impending recession next year. Contrary to the Federal Reserve’s projection of a 75 basis point cut in the fed funds rate, Gundlach envisions a more drastic reduction of 200 basis points.
This breach of the 4% level signals a potential decoupling of the typical correlation between strong bonds and strong equities. With this in mind, Gundlach’s advice for investors in 2024 leans towards long-dated bonds. He suggests transitioning from short-dated T-bills to long-duration Treasurys once the recession hits.
Gundlach challenges the notion that the surge in money market funds will flow into the stock market. He argues that investors, who are currently favoring risk-free 6-month T-bills, are unlikely to shift towards high P/E stocks, even among the ‘Magnificent Seven,’ at record Dow Jones highs. Instead, he sees a more probable move towards bonds, as investors seek safer havens in uncertain economic times.
This strategic shift underscores the need for investors to stay vigilant and adapt to the evolving economic landscape, particularly in light of the recent bond market movements and the Federal Reserve’s monetary policy direction.