Falling bond prices are sending an alarming signal that a recession could finally be around the corner as they push Treasury yields to their highest levels in 16 years, said DoubleLine Capital founder Jeff Gundlach.
Economists use the yield curve as a barometer of a healthy economy. Typically, an inverted yield curve, when short-term yields climb above long-term yields, is seen as a reliable sign that a recession is coming. Yield-curve inversions have preceded practically every recession since the 1960s, data show. The logic is that investors seek out longer-dated bonds to lock up their capital for longer to ride out any incoming tumult in the economy.
As of 3 p.m. Eastern Time on Tuesday, the spread between the yield on the 2-year Treasury BX:TMUBMUSD02Y and 10-year Treasury had narrowed to negative 34.7 basis points, with the 2-year at 5.148% and the 10-year BX:TMUBMUSD10Y at 4.801%, according to Dow Jones Market Data. Both the 10-year and 30-year Treasury bonds BX:TMUBMUSD30Y reached their highest levels since the second half of 2007 on a 3 p.m. Eastern Time basis, according to Dow Jones data. The yield on the 30-year bond briefly topped 5% overnight.Gundlach wasn’t the only “bond king” to warn about the ramifications of higher interest rates. Bill Gross posted Tuesday that mortgage rates at 7.7% would soon “shut down” the housing market.