Gundlach On Why Interest Rates Are Falling

March 24, 2017

Who would have thought that after the Fed hiked rates for the second time in three months that Treasury yields would actually decline? But that's exactly what's happened.

The 10-year U.S. Treasury bond yield dropped from 2.6% on the day before the March 15 decision to 2.4% now, confounding many investors who had expected rates to continue climbing.

However, one person who’s not surprised is bond guru Jeffrey Gundlach. In a webcast that took place earlier this month, he predicted rates would go lower before they went higher, something that seems to be playing out in the markets right now.

Copper/Gold Ratio Signal

In his presentation, Gundlach forecasted that there would be a tradable rally in the 10-year bond, which would push the yield to below 2.25% (bond prices and yields move inversely). He pointed to record short positions in Treasuries as fuel for the countertrend rally.

Gundlach also said the copper/gold ratio suggested that the 10-year yield had more downside in the short term. The ratio has historically had a tight correlation with the 10-year yield, as can be seen from the chart below:

 

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