Gundlach Says 10-Year Treasury Above 3% Would Drive Down Stocks

(Bloomberg) -- If yields on the 10-year Treasury break above 3 percent, there’s a high chance U.S. stocks will end the year down, according to Jeffrey Gundlach, chief investment officer of DoubleLine Capital.

“My idea that the S&P would go down on the year would become an extraordinarily strong conviction as the 10-year starts to make an accelerated move above 3 percent,” Gundlach said Tuesday during a webcast for his $51.8 billion DoubleLine Total Return Bond Fund.

Yields on 10-year Treasuries closed Tuesday at about 2.84 percent, down from their four-year high of 2.95 percent on Feb. 21. The S&P 500 Index closed at 2,765 on Tuesday, up 3.4 percent this year.

DoubleLine Total Return, which invests mostly in mortgage-backed securities, returned an annual average 2.6 percent over the past five years, outperforming 89 percent of its peers through March 12, according to data compiled by Bloomberg.

Gundlach, whose Los Angeles-based firm oversaw about $118 billion as of Dec. 31, said the chances of 10-year Treasury yields exceeding 3 percent are increasing amid rising U.S. deficits and the Federal Reserve reducing its balance sheet while raising its benchmark short-term interest rate.

Among Gundlach’s other comments:

• The U.S. deficit is likely to exceed $1.1 trillion in fiscal 2019 because of a combination of tax cuts and rising entitlement expenses. “It’s going to be more like $1.2 or $1.3 trillion,” he said.
• Leading economic indicators show no signs of a recession within the next 12 months.
• Core inflation is likely to increase above the Fed’s 2 percent target.
• Be prepared for further weakening of the dollar. “The odds are good that the next big move in the dollar is lower,” he said.

Gundlach Says Volatility ‘Genie’ May Not Be Back in Its Bottle

--With assistance from Brian Chappatta

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net.

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Josh Friedman, Dan Reichl

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