Billionaire Jeff Gundlach’s yield curve inversion warning: ‘These are reliable signals of economic trouble’
(Kitco News) Investors should manage risk appropriately as yield curve inversions signal trouble ahead, said Jeffrey Gundlach, CEO of DoubleLine Capital.
Recession signals are getting worse, Gundlach tweeted this week, pointing to the inversion of the 2- and 10-year yield curve and the inversion of the 5- and 30-year curves.
“In the US market: 2y/10y reversed 35 bps. 5y/30y reversed again, five basis points right now,” he said. “These are reliable signals of economic difficulties. Manage risks accordingly.”
A yield curve inversion occurs when short-term Treasury rates rise above long-term yields. The market often views the inversion of the 2-year and 10-year yield curve as a reliable warning sign of a long-term recession.
On the UST market: 2y/10y reversed 35bp. 5y/30y reversed once again, five basis points right now. These are reliable signals of economic difficulties. Manage risks accordingly.
— Jeffrey Gundlach (@TruthGundlach) August 31, 2022
There have been several reversal attempts this year. In March, the 2-year and 10-year yields reversed for the first time since 2019. Then it repeated briefly in June. And since July, the curve has remained inverted.
The 10-year Treasury yield was last at 3.264%, while the 2-year Treasury yield was 3.52%. Meanwhile, the 30-year Treasury yield was last at 3.371%, while the 5-year Treasury yield was at 3.396%.
Recession fears have increased since the Fed introduced its outrageous 75 basis point hikes in June. However, Fed Chairman Jerome Powell’s Jackson Hole speech last week reignited those worries, doubling the risk aversion sentiment in the market.
During the speech, Powell remained hawkish and signaled that rates could stay higher for longer. He also warned that there would be “suffering for households and businesses”, which “are the unfortunate costs of reducing inflation”.
The Fed Chairman added that even after several aggressive rate hikes, this is not “the place to stop or take a break.” Powell also did not rule out another 75 basis point hike at the September meeting, reiterating that much will depend on macroeconomic data released over the next three weeks.
Gundlach has been under surveillance since January. And in March, he told investors to pay close attention to the inverted yield curve, stressing that it was important.
“Just at the right time, the ‘It doesn’t matter this time’ white papers are coming out. Don’t believe them,” he tweeted.
The Treasury yield curve is now diverging:
Ten years minus two years: 3 basis points
Thirty years minus five years: 0 basis points
Just at the right time, the “It doesn’t matter this time” white papers come out.
Don’t believe them.
— Jeffrey Gundlach (@TruthGundlach) March 29, 2022
During his webcast for investors, Gundlach said the reversal in 2-year and 10-year yields had successfully predicted economic downturns each of the past four times.
“An inverted yield curve … would make a very strong case for a recession,” Gundlach said on the March call. “The rise in the 2-year Treasury yield was virtually as steep as the decline during the lockdown.”
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