The debate over what yield on the 10Y spells the end of the 30 year bond bull market, and would spillover into selling among other asset classes, is heating up.
Earlier this week, in his monthly annual letter Bill Gross wrote that 2.6% is the only level for the market that matters: "This is my only forecast for the 10-year in 2017. If 2.60% is broken on the upside – if yields move higher than 2.60% – a secular bear bond market has begun. Watch the 2.6% level. Much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important that the Dollar/Euro parity at 1.00. It is the key to interest rate levels and perhaps stock price levels in 2017."
Later that day, during his webcast with investors, Doubleline's Jeff Gundlach slammed Gross as a "second tier bond manager" for his "forecast", and countered that 3.0% is the magic number: “the last line in the sand is 3 percent on the 10-year. That will define the end of the bond bull market from a classic-chart perspective, not 2.60%” as Gross suggested. He then added that “almost for sure we’re going to take a look at 3 percent on the 10-year during 2017, and if we take out 3 percent in 2017, it’s bye-bye bond bull market. Rest in peace.”
Today, a third bond manager joined the frey when Guggenheim's Scott Minerd sided with Gundlach and said that 10-year yields could end their long-term trend if they rise above 3%.
“It’s basically the beginning of the end,” Minerd told Bloomberg Television. “Long-term trends like this don’t reverse quickly,” he added, saying yields might spend several building a new base before taking off."
Minerd also said the Federal Reserve risks falling “behind the curve” on the U.S. economy and needs to raise interest rates in March, a step that markets see as far from certain. Futures trading implies a roughly 30 percent chance, according to data compiled by Bloomberg. The fund manager also said that while stock markets may be volatile as President-elect Donald Trump takes office, his policies ultimately can provide a “potent mix” for economic growth. The S&P 500 Index, now at 2270, is likely to end the year in the 2450-2500 neighborhood, according to Minerd.
However, he cautioned that markets continue to disagree with the Fed's dot plot signaling where rates are headed, which makes “the market is vulnerable to a tantrum."
Also, he said that "as the business cycle ages, in 2019, 2020 when we could anticipate we might have another recession, that there will be another deflationary burst that will bring rates back down if we do get above 3%, but we haven't violated that trend yet."
We have little to add to this pissing contest about whose prediction about the number that marks the end of the bond bull market will be right, suffice it to say that it truly is a bizarro world when some of the smartest bond managers are arguing over some squiggles on a chart.