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Falling U.S. bond prices are sending a 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.
He will be watching Friday’s September jobs report for the next clue that a recession may be imminent.
In a post on X, the social-media platform formerly known as Twitter, from Tuesday evening, Gundlach warned that the rapid normalization of the Treasury yield curve — a measure of the premium that investors receive from investing in long-term and ultra-long-term bonds — is a sign that a U.S. recession, for which investors have been bracing since last year, might finally be around the corner.
“The US Treasury yield curve is de-inverting very rapidly. Was at -108 bp a few months ago. Now at -35 bp. Should put everyone on recession warning, not just recession watch. If the unemployment rate ticks up just a couple of tenths it will be recession alert. Buckle up,” Gundlach said in a tweet.
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 weakness in the economy.
But recessions often follow inversions with a lag, though bond-market experts have observed in the past that when the yield curve starts to normalize following a period of inversion, it has in the past signaled that the countdown to recession is almost over.
Read more: Banks are bracing for a recession as Treasury yields surge
The yield on the 2-year Treasury note has been consistently higher than that of the 10-year since July 11, the longest period of inversion since 1980, according to Dow Jones Market Data.
As of 3 p.m. Eastern Time on Tuesday, the spread between the yield on the 2-year Treasury
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and 10-year Treasury had narrowed to negative 34.7 basis points, with the 2-year at 5.148% and the 10-year
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at 4.801%, according to Dow Jones Market Data.
Gundlach said he believes the Federal Resrve’s interest-rate hikes since March 2022 will soon drive the U.S. economy into a painful recession that should begin during the first half of 2024 as the labor market finally succumbs to pressure from the central bank. He added that he expects the Fed will cut interest rates in response, sending bond prices higher and yields lower.
Both the 10-year and 30-year Treasury bonds
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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.
Also: Rising Treasury yields are upsetting financial markets. Here’s why.
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.
The U.S. Department of Labor will release its next employment report on Friday, which will include a reading on the jobless rate. Economists polled by The Wall Street Journal expect the unemployment rate to tick down to 3.7%, compared with 3.8% during the prior month. They also expected that 170,000 jobs were created last month.
Wall Street economists had anticipated a recession to start earlier this year, but a number of factors, including resilient consumer savings, companies and households having locked in low interest rates in years past, and the artificial-intelligence boom for some companies, helped boost growth instead.
While the labor market has started to cool, other economic indicators, outside of the manufacturing sector, look relatively healthy. The Atlanta Fed’s GDPNow forecasting tool sees GDP growth of 4.9% for the third quarter.
