Will The Real Bond King Stand Up?

We get it.

Jeff Gundlach (we are some of his biggest fans) is a trader at heart, as are we, and is very cognizant of short-term market technicals.

He recently tweeted,

However, it was only June he stated

So it’s eye-catching, then, that Gundlach reiterated in a webcast on Tuesday his call that the 10-year Treasury yield would rise to 6 percent by 2020 or 2021. “We’re right on track” for that, he said. As a reminder, that would be the highest yield since 2000.

His reasoning is fairly straightforward. The combination of rising U.S. interest rates and fiscal deficits is like a “suicide mission,” he said in the webcast, escalating the intensity from last month when he referred to the trend as a “pretty dangerous cocktail.” Ultimately, the debt burden will rise to such a level that borrowing costs will surge, in his estimation. That hasn’t happened yet because ultra-low German yields are capping how much Treasuries can sell off.   – Bloomberg

Wow,  6 frickin percent!

Two Views Are Consistent

We are with Jeff.

In the near term, the bond shorts may be scorched (or may not) with their record off-side position but given time long-term interest rates are going much higher than the markets believe.  Deteriorating flow technicals will bring term premia back with a vengeance.

European Bond Bubble

The trigger will most likely be the bursting of the European bond bubble.

The Portuguese 10-year trading at half the yield of the 10-year U.S. Treasury?   Come on, man,   Are you serious?

When Super Mario takes his foot off the pedal, turn out the lights on those holding the Spanish 2-year at -0.327 percent, or the 10-year bund at 0.34 percent.

Dr. Ed recently wrote,

The Bond Vigilante Model suggests that the 10-year Treasury bond yield tends to trade around the growth rate in nominal GDP on a y/y basis (Fig. 1). It has been trading consistently below nominal GDP growth since mid-2010. The current spread is among the widest since then, with nominal GDP growing 5.4% while the bond yield is around 3.00% (Fig. 2). – Ed Yardeni

German nominal GDP is also running around 5 percent, and the 10-year bund is trading at 34 bps.  Absurd.

But, hey, that is the market we are dealt.

QE Distortions To Work Off Slowly

The markets are so distorted by QE it is going to take some time to normalize interest rates and asset prices.  The consequence may be some inflation headaches for the central banks over the next few years.

We are holding off our piece on interest rates until everyone returns from the beach.

Stay tuned.