Some of the biggest names in the bond world are at odds about just how far Treasuries can rally now the Federal Reserve has signaled a pivot toward interest-rate cuts.
Jeffrey Gundlach at DoubleLine Capital says US 10-year yields will fall toward the low 3% range as the central bank is likely to slash its cash-rate target by a full two percentage points next year. Former Pimco bond king Bill Gross dismissed such euphoria, saying the yield is already about where it should be at just on 4%.
“We’ve broken down the trend lines and there’s a lot of room” below the current 10-year yield level, Gundlach said in an interview. “The economy is going to undershoot the downside and that is going to create a response. We will have to have a lot of money printing.”
Gross, who formerly managed the world’s largest bond fund, said forecasts for 10-year yields to fall to 3% next year are “farcical,” even if the Fed does cut rates as much as Gundlach projected, according to a posting he made on X.
Treasury yields tumbled Wednesday after the Fed forecast three interest-rate cuts for 2024, a more dovish outcome to its policy meeting than the market was expecting. US sovereign debt is set for its first annual gain in three years, with a Bloomberg gauge of the securities now up almost 3% for the year.
My portfolios are dominated by a potential disinversion of yield curve.
Long UST 2 short UST 10. Equal duration.
Stock sectors that should benefit from this are banks and mtge REITs.
— Bill Gross (@real_bill_gross) November 30, 2023
The benchmark 10-year yield slipped a further five basis points Thursday to as low as 3.97%, down from a peak of 5.02% set in late October. The yield curve is still inverted, with two-year yields higher than their 10-year counterparts, but the spread between the two has narrowed by 16 basis points over the past two days to just 37 basis points.
One thing Gundlach and Gross agree on is that the yield curve should become un-inverted again. Gross has said he expects that to mostly occur through a drop in shorter-maturity yields.
Gross’s view that longer-maturity Treasury yields are unlikely to fall much further is shared by the majority of the 190 respondents to an MLIV Pulse survey conducted after the Fed decision. The 10-year yield is set to end next year at 3.98%, according to the mean response to the survey, with participants also saying markets are projecting too many rate cuts for 2024. Rates traders are pricing in about 150 basis points of reductions, according to data compiled by Bloomberg.
Both Gundlach and Gross had been betting on bond gains in recent weeks. Gundlach said at the start of November — when 10-year yields were around 4.70% — that a rally was getting started. Gross made millions off a bet interest-rate futures would soar on recession bets, that he announced when he placed it in October.
This article was provided by Bloomberg News.