The 10-Year Will Hit 2.5% This Year, and Maybe 3%, Per Gundlach

So how high can the 10-year Treasury go? How about 3%? That’s what the Bond King sees as possible.

For sure, says Jeffrey Gundlach, chief of DoubleLine Capital, the benchmark 10-year note will hit 2.5% this year. It briefly rose above 2% on Thursday, and finished the week at 1.94%.

“The 10-year will probably make a move toward 2.5%,” Gundlach told CNBC. “It’s possible the 10-year takes a peek at 3% this year. I’d be a little bit surprised if it does make it all the way to 3%.”

The last time it breached 3% was in 2018, the end of the Federal Reserve’s last rate-hiking cycle. In mid-2020, amid the pandemic’s onset, it dipped as low as 0.5%.

The 10-year yield has been climbing higher in 2022, as the Federal Reserve readies a rate-increase campaign starting in March. Meanwhile, the central bank is ending its pandemic-rescue effort to keep down long-term rates, in particular those of the 10-year, which influences many other interest rate levels, such as home mortgages. As such, the Fed is winding up its massive buying program for Treasurys, chiefly the 10-year.

Gundlach also said he expects the Fed will raise short-term rates five times in 2022, even though he has sighted some “recessionary indicators.” “The probability of weaker economic activity later this year is pretty high,” he warned.

One recession signal he foresees is an inverted yield curve. The spread between the two-year and 10-year Treasurys has narrowed a lot, to 0.42 percentage point. That’s half of what it was at the start of the year. If the curve does invert—that’s when short-term rates are higher than long-term ones—it’s typically a sign of an impending recession.

Another factor that could drag down the economy is that government stimulus has dried up. “We have enough recessionary potential with … the fiscal drag with the consumer not having stimulus,” Gundlach said.

None of this is great for the stock market, he observed, pointing to the S&P 500’s 7.3% decline this year. “Interest rates are going higher, every risk asset has to reprice based on these higher interest rates, and it’s a process where capital preservation becomes important,” Gundlach said.

Nevertheless, Gundlach believes that the Fed is late in its bid to tighten and try to restrain the current spurt of inflation. Put it all together, and Gundlach said he is opting for “non-West investments.”

While noting that US stocks have rounded those elsewhere, he said that “some of these other regions has already shown very significant signs of reversing moment and starting to favor the non-US investments.”