Long-term bond rates may have peaked already, and if rates continue to fall, a “melt up” in the bond market could be in the offing, according to Jeffrey Gundlach, founder of Doubleline Capital.
“If we go down [more] on Treasury yields, we will see one of the biggest short-covering scrambles of all time,” Gundlach said Wednesday at the Altegris strategic investment conference in San Diego.
Funds that short Treasuries, such as unconstrained bond funds, long junk/short Treasury funds and ETFs that short U.S. bonds with leverage, were popular last year, he said.  
“Speculation in the market on shorting Treasuries was very high,” Gundlach said. “If for some reason someone has to cover these shorts, you could actually see the low yields of 2012 get taken out.
“I’m not predicting that,” Gundlach quickly added. “I think it’s a 30 percent chance only, but I used to think it was a 10 percent chance.”
The 10-year Treasury note has a “massive resistance point at [a yield of] 2.47 percent, and all year like a broken record I’ve said it’s going to 2.47. Today, I think it hit 2.52. … If 2.47 gets broken, I think the melt-up starts. We’re getting close to the moment of truth.”
The 10-year Treasury yield fell 9 basis points to 2.528 percent Wednesday.
With Treasury yields relatively attractive compared to other bonds, Gundlach said long bonds might not react much once the Federal Reserve raises rates.
“I’ve been of the opinion, based on market action so far year to date, [that] the yield curve may flatten at around 3.5 percent,” he said. “Wouldn’t that be a kick in the head? That’s what happened in 2004 to 2006. …The Fed lifted rates quite a bit, and the long bond barely budged.  … The 30-year Treasury may have already peaked if we start this tightening cycle anytime soon.”
Based on historical ranges of relative yields, mortgage-backed bonds look “reasonably attractive” compared to Treasuries, Gundlach said, while municipal bonds and emerging-markets bonds are overvalued, and investment grade corporates appear “massively overvalued.”
High yield is even more expensive, he warned, and junk paper has more risk than most think.
“People love junk bonds because for some weird reason they feel [junk bonds] don’t have interest rate risk,” Gundlach said. Last year, high-yield paper held up as rates rose, but there’s no longer a large enough yield cushion to protect junk investors from higher rates.
“That can’t happen again, not at these interest rate differentials,” he said.
“The cheapest [bond] now is the long-term U.S. Treasury, believe it or not,” Gundlach added. “No wonder  there has been this move down in Treasury yields of some significance.”


Ten year inches close to 2.47 percent ......

United States Government Bonds


  • Current2.49
  • 1M Ago2.63
  • 1Y Ago1.94
TenorCouponPriceLast1 Month1 YearTime
3 Month0.00000.01500.02%-1-220:24:09
6 Month0.00000.04000.05%-1-420:23:34
12 Month0.00000.07500.08%-1-320:26:29
2 Year0.3750100-01½0.35%-2+1120:09:10
5 Year1.6250100-14¼1.53%-10+7020:07:46
10 Year2.5000100-01¼2.49%-14+5520:05:32
30 Year3.3750100-24½3.33%-14+1720:19:29


European Bonds Tumble Most In 15 Months, Stocks Slammed

Tyler Durden's picture

The one-way street in European peripheral bond yields/spreads... is over. Today sawItalian, Spanish, and Portuguese bond spreads smashed higher by the most in over 15 months. European stock markets all tumbled too with the FTSE-100 down over 3.5% and Portugal down 2.8%. Greece's retroactive tax idea (quickly denied) drove Greek stocks into the red for the year and slammed the new GGB issue lower. Europe's credit markets cratered wider and Europe's VIX burst back over 17.

Ugly day for European stocks and bonds...

Leaving Greek stocks red for the year and the high beta names tumbling...

Worst day for EU bonds in 15 months...