This Is What Jeff Gundlach Thinks Is "Fair Value" On The 10 Year

As Bloomberg's Michael Regan writes, "pinpointing the exact level of Treasury yields that will break the back of the bull market has become the trendiest parlor game in town." Earlier today, Tom Lee of Fundstrat became the latest to chime in, predicting that rates - which are rising due to reflation, - should support higher P/E ratios until interest rates are above 4%.

Then, it was Jeff Gundlach's turn.

Recall that it was Gundlach who during a DoubleLine webcast on January 9 predicted that if the 10Year goes to 2.63% - it was at 2.50% then - "stocks will be negatively impacted." However, he also added that if the 10Y TSY passes 2.63%, it will head well higher, likely pushing toward 3%. Gundlach also was the first to note that he expects a 3.25% print on the 10Y in 2018, a target which was since adopted by both Goldman and, today, Bank of America.

Fast forward to today when speaking on CNBC, Gundlach estimated the fair value on 10Y yields in the USA to current nominal GDP. The gap is notable as current nominal GDP prints are above 4% with 10y yields below 3%.

Here is what he told CNBC:

Let’s start out with something people think I know something about, which is the bond market. And it seems that bond yields, let’s just talk about the ten-year treasury, are at a level that makes a pretty good of sense right now. I mean they’ve gone up a decent amount so far this year – ended last year at about 2.41% or so, they’re up 46 basis points or so. But one thing that people talk about is nominal GDP, and I’ve been talking about this for a long time. It’s a fairly good starting place, where you think about maybe the ten-year treasury should be.

Obviously there’s a lot of noise. I mean, they don’t track each-other anywhere close to perfectly. But it’s sort of like a dog that’s tied to a stagecoach that’s going across the country. It’s on a 100 foot rope, I mean, sometimes it will be behind the stagecoach and sometimes ahead, but if the stage coach is nominal GDP, and the not ten-year yield is sort of a dog, and yeah, there will be variation, one versus another, but they’re both going to end up going across the country together. There’s no way the dog can really stay that far away from the stagecoach.

So what’s going on now, nominal GDP in the united states is at 4.4%, which sounds really high compared to the 2.87 10-year treasury yield. But to be honest, it’s also manipulated. We should talk about Germany as a good starting place. The German yield is way down at a ridiculously low level because it’s manipulated. So the economic facts of Germany and the United States are not that different. The nominal GDP is about the same, the inflation rates aren’t that different, manufacturing is good in both areas, retail sales are good in both areas, but the German yield is being manipulated.

So when you think about a 10Y treasury yield, what we’ve been doing at Doubleline for the past few years really, is noting that it tends to reside in the average of nominal GDP and the competitor yield, which is the German yield.

So let’s look at where we are today.

The German yield is roughly 70 basis point, and nominal GDP is probably going to go up a bit, because GDP now from the Atlanta fed is 3.2% at present, and we’ll tack on a little bit of inflation, so let’s call it 5%. And so if you have 5% for nominal GDP in the U.S., and you have 70 basis points on Germany, add those together, you get 5.7. You divide by two, and lo and behold, you get 2.85%, which is within two basis points, even slightly less than that, as where you are today. So as long as bond yields do not break out to the upside, which is a clear and present danger right now, then you probably can keep some stability going in risk markets

Which then brings us to the follow up question: will yields break out to the upside? Here is what Gundlach said:

I have a low conviction feeling that we’re going to break out to the upside on yields. When I talked at the Barron’s roundtable earlier in January, I talked about how rates would likely rise this year, and a lot of people agree with that.

But right now the market is pressing right up against incredibly powerful yield resistance, particularly on the 30-year treasury bond.  The trendlines are all gone on all the maturities of the treasury market. If you go to the trendlines back to the last 5 years, in many cases even the great bull market that’s over 30 years, the move up in rates since September has taken out all of those trendlines. In fact, interest rates across the yield curve, other than the 30 year treasury have been rising since September 7th at an annual rate of about 200 basis points.

We’re coming up on almost five months into this yield rise, almost – really, coming up on almost six months now for this yield rise, they’ve been rising pretty quickly, but all the trendlines are gone. On the 30 treasury, you still have this one last line in the sand of – declaring that the bull market might still be intact and that’s the pivot point, which was the high yield back 18 months or so ago, and that’s at 3.22%.

So fascinatingly, the 30-year treasury bond closed at 3.22% a couple of days ago, right there, and it didn’t close above it. So for now, we’re only 6 basis points away from this incredibly important level.

So my viewpoint is this is a terrible trade location to be selling longer-term treasury bonds.

I’ll put it another way - if long-term treasury bonds are a great sale at 3.16%, they’re also a great sale at 3.25%. And we’re going to let the market decide on itself, give a signal as to if this breakout is going to happen.

If you force me to make a bet, I would say I do think they’re going to break to the upside. And when they do, they will accelerate. And if they accelerate, clearly what’s happened ever since 2.50% was breached on the 10-year treasury is the prices of treasury bonds and the prices have equities have started to become more correlated, meaning that when yields go up, stocks start to suffer. And I think, if we started to tack on significant yield with the breakout from these levels, it seems to me we would go back into another drop for risk assets.

So with all that said, here is a convenient paraphrase from Citi, which - taking Gundlach's logic one step further - writes that perhaps a better metric for “fair value” or preferably a solid back of the envelope for 10Y yields is potential nominal GDP: this is also convenient because the CBO publishes this metric for years into the future.

Finally, the chart below suggests that any move above 4% on the 10y bond is unlikely to be sustainable while current yields are closing the gap from obviously too low to just about right.



Rise Of The Machines Fri, 02/23/2018 - 15:34 Permalink

Pull up  a 5 year or longer weekly chart of the T-Bond price. Put the MA's on and tell me that's not done. Seriously I think the bond bull market is over! Then switch to a monthly time frame. All the big monthly averages are busted too!

ktown Gadocat Fri, 02/23/2018 - 17:08 Permalink

Its a hedge fund! The Fed got paid, weak hands got their toes burnt and vigilantes stayed together almost a fortnight to help credit catch up to markets? The stock market is in big trouble and talking soft on Friday would not be obtuse, however Ms. Stock market has everyone's attention not because of valuation but because they have noticed the easy  correlation of good verses  bad by huge numbers with little grasp at percentages? It a poor time to expect to buy anything low?

In reply to by Gadocat

rex-lacrymarum Gadocat Fri, 02/23/2018 - 18:50 Permalink

With respect to that "yields will rise" story I can hear Methuselah's beard wind-up machine humming in the cellar. 

The Fed is about as "private" as an arm of the government will ever be... totally "independent", right?  It's not as if its entire board of governors were government-appointed and the entire charter that spells out what it can and cannot do an Act of Congress. 

You are quite correct that investors have far more influence on bond prices than the Fed. Keep in mind though that a vast chunk of these investors are price-insensitive foreign central banks. Moreover, if it so desires, the Fed can definitely "potty-train" investors to do its bidding, by simply threatening that it will enforce a ceiling on yields. It did that successfully for more than a decade when the "Fed-Treasury Accord" was in force. 


In reply to by Gadocat

gatorengineer Fri, 02/23/2018 - 15:35 Permalink

So assumed  5 percent US GDP corrected for 10 percent inflation is Negative 5 percent real growth (optimistic, its shrinking faster than that), Germany has a 2 percent GDP and lets also say 10 percent inflation for negative 6 percent.  so the real treasury yield should be negative 5.5 percent, so we are about 2.3 percent above where it should be at 0.5 percent.  Correct, do I get a Nobel in Economics.... if Bathouse Barry gets a peace prize surely....

Not Too Important Fri, 02/23/2018 - 15:35 Permalink

When the world realizes America is dying and no one will buy her debt, yields will rise to infinity.

No, wait, the Fed will print and buy them all up like Japan does and yields will go negative.

True story.

Dragon HAwk Fri, 02/23/2018 - 15:41 Permalink

I lent my Buddy  ten thousand dollars for ten years, he promises to pay me back  50 cents plus the  10k. I got a great deal because at least it's not Negative  Right?

fbazzrea Fri, 02/23/2018 - 15:45 Permalink

anyone can come up with numerical relationships between non-correlated factors if given enough time and imagination... and in Gundlach's case, rope.

ikemike Fri, 02/23/2018 - 15:48 Permalink

Rates aren't only costs. They are profits.  Normalized rates are what keep big ticket prices sane and markets prudent. A good 5 percent yield to start would be good.. Should be more.  Intrest on savings is what we need again.  A sober look at housing.  Its time to decide if slaving away for 30 year mortgages is worth it.  Ill say that yearly interest payments on a 500000 starter will be laughable and it should.  Then the nice profits go  to the savers through the banks. 

taketheredpill Fri, 02/23/2018 - 16:03 Permalink


Take a look at US 10s going back 25 years.  Look at what happened when US 10s got to the top of the downward trading channel.

Bond yields fell and shortly afterwards equities cracked.

The declining US 10s yield channel has tracked inflation lower.

Inflation has tracked lower because the US has borrowed it's way out of every recession.  And debt borrowed is future consumption brought forward.'

When you borrow and spend today you have to pay for the debt afterwards.  And interest payments down the road is money that isn't spent on consumption.

Therefore lower growth is baked in (unless the growth you got from the debt is enough to pay down the debt...).  And lower inflation.

When US 10s break up through the top of the channel yields will pop +300 bp very very quickly.

BUT...just do not see why that will happen now.


HOWEVER the big question to keep in mind is this.  IF US 10 yields, having hit the channel top, start to fall, WHY?  If yields drop from this point then WHAT do GOVERNMENT bonds know that the rest of the market doesn't? 

rex-lacrymarum taketheredpill Fri, 02/23/2018 - 19:04 Permalink

Hallelujah, you actually ask the right question!  I also think that upper channel boundary won't break, and the upcoming decline in yields is highly likely to go hand in hand with a sharp slowdown in economic activity and plunging stock prices. The reason is the enormous slowdown in money supply growth, which is now accelerating further due to "QT". It started (honi soi qui mal y pense) right after the election, when money supply growth (broad and true, TMS-2) peaked at nearly 12% y/y. Since then it has plunged to less than 3% y/y, a level last seen in early 2007. In the year preceding the election, broad MS growth was boosted from 8% y/y to 12% y/y, but it was still not enough to get the Hildebeast elected, which is quite telling (by contrast, in 2008 - despite the crisis! - the Fed waited carefully until after the election before it started boosting the money supply). 

In reply to by taketheredpill

REAL MONEY Fri, 02/23/2018 - 16:08 Permalink

Is this guy serious, come on.  He basis normalized rates or true measures based off of another economy(Germany) that is as badly manipulated as ours.  Guys like this are incredible.  I got news for you Gundlach, what is moving rates is the complete rejection of the dollar by economies who are sick of eating our inflation.  Rates are either going a lot higher or the $ is going to crash.  Those are the only two choices.  I suspect that we will see Hyperinflation fairly soon as China and Russia are almost done putting their plan in place.

khakuda Fri, 02/23/2018 - 16:18 Permalink

Interesting reasoning, but the real issue is that the German yield and the US yield are manipulated, so both are too low.  The German one is completely crazy at this point.  Manipulated bond prices = manipulated stock prices until the manipulation ends or fails.  Either way, it feels like buying stocks here is asking for trouble.

taketheredpill Fri, 02/23/2018 - 16:35 Permalink

In 2000 US 10 year Yields rose towards the top of the Trading Channel in place since 1994.  It looked like US 10s were on their way to catch up with Nominal GDP which had been averaging around 6.3% over the previous year.  But 10 year yields hit the top at 6.0% and then dropped.  It ended up being GDP that caught down to falling yields.

Likewise in 2007, US 10 year Yields rose towards the top of the Trading Channel again. It looked like US 10s were on their way to catch up with Nominal GDP which had been averaging around 5.5% over the previous year.  But 10 year yields hit the top at 5.25% and then dropped.  It ended up being GDP that caught down to falling yields.

So...maybe US 10s break up through 3.0% this time?  If so, they will go to 6.0% in a month and you can start pricing in Nominal GDP of 6% or Real GDP above 4%.

BUT if yields don't break up through 3% and instead keep falling.....