Someone Just Made A $75MM Bet That Jeff Gundlach Is Dead Wrong

In his monthly must-see live webcast this week, DoubleLine CEO Jeffrey Gundlach made one very specific call (among others) that stood out to many listening in on the call.

Having explained that the combination of rising U.S. interest rates and fiscal deficits is like a "suicide mission" - which notably escalated the intensity from last month when he referred to the trend as a "pretty dangerous cocktail" - Gundlach concluded that the debt burden will rise to such a level that borrowing costs will surge.

To be specific, Gundlach said, the 10-year Treasury yield would rise to 6% by 2020 or 2021 adding that "we're right on track" for that.

That would be the highest yield since 2000..

Bear in mind Gundlach alternatively signaled that a recession is possible by 2020, which could make the next presidential election “a wild ride," and notably reduce interest rates.

Judging by the record short positioning across the Treasury complex, there are plenty that agree with him...

However, not everyone agrees.  Lacy Hunt, the well-known bond bull at Hoisington Investment Management, told Bloomberg in an interview that:

“I believe that we're closer to the peak - or at the peak - at the longer end of the market."

"You come in and undertake a massive increase in debt, and the economy gets a transitory boost in economic activity. The consumer has already spent a lot of the tax cut, but the debt lingers.”

And additionally, this week saw someone place a large $75 million options bet that Gundlach is dead wrong and in fact 10Y Treasury yields tumble back to 2.60% first.

As Bloomberg reports, over the first three days of this week, traders paid more than $75 million combined to buy almost 200,000 call options on 10-year futures.

Monday saw the purchase of 100,000 contracts in a call-option spread on 10-year futures, for a premium of $45 million, targeting a drop to about 2.6 percent before the contracts expire on Aug. 24.

Traders plowed into bullish options bets again Tuesday, purchasing 50,000 calls for a premium of about $20 million, targeting a drop in yield to 2.9 percent or lower by July 27.

And on Wednesday, traders added to that bet by purchasing 40,000 call-spread contracts for a premium of $12.5 million, with maximum upside reached on a drop to 2.6 percent.

Overall the position has around a $3m/DV01.

Coming just weeks after 10-year yields set an almost seven-year high above 3 percent, the bets amount to a bold call targeting a drop to as low as about 2.6 percent before the biggest chunk of the contracts expire Aug. 24.


And whoever this bullish bond options BSD is - putting 10s of millions on the line that Gundlach is dead wrong - Bank of America's rates strategy team agree, seeing rates notably lower ahead.

Last week, the 10-year Treasury yield reached as low as 2.7578% - a 37bp decline from the most recent peak of 3.1261%. This move confirmed that a multi-month rally is under way.

As discussed last week, we expect an 11-16 month rally that will eventually lead the 10-year Treasury yield down to at least 2.30% or possibly even below 2%.

Our targets, however, require a change in Fed posture during the next few months. As such, the Fed meeting next week will be pivotal. The Fed is widely expected to deliver a 25bp rate hike, though the market is mostly concentrated on a forward posture. With the 5/30 curve poised to take out the 25bp low in May (see Exhibit 1), the meeting is an opportune time for the Fed to evaluate whether it should drive the curve to a flat - or even inverted - shape.

Prior to the financial crisis, each Fed tightening cycle ended with an inverted Treasury curve. Given the structural issues with the global economy, we believe the Fed should avoid driving the curve down that much - though forward development after the June hike may not be something the Fed can control.

We believe the recent problems in Europe and emerging markets are just a prelude. More issues can be expected in the summer and onward. Typically, after problems affect emerging markets, generally the high yield market is impacted next. The Treasury market rally would increasingly look like a flight to quality as the market progresses.

Our suggestion of a possible Fed dovish turn is also based on an observed, long-standing Fed/ECB dance. We recall that the Fed announced QE tapering in 2013, completed QE tapering in 2014 and eventually hiked rates in 2015. During the same period, the ECB walked an opposite path, cutting rates aggressively, discussing possible QE and then eventually entering QE in 2015. The ECB QE is scheduled to end this September. This "dance" of central banks has been one of the main reasons the global economy and markets have been in a steady growth mode. Now that the ECB is ready exit QE, it is perhaps time, too, for the Fed to think about exiting its tightening program.

Such a switch of roles of central banks would be decisive for our rates view.

Time will tell.


ravolla SumTingWongJr Wed, 06/13/2018 - 21:42 Permalink

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Biblicism     AND    TodaysFox ("I made $7000 sucking cock on the Internet")  IT's ALL THE SAME SPAMMER!

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MEET my current imaginary friends.  We all live in one SPAMMER's HEAD (and as ACTION FIGURES on his kitchen counter) but as for me, I have gone off the reservation.  These other "personalities" are pretty troubled.

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In reply to by SumTingWongJr

lookslikecraptome ravolla Thu, 06/14/2018 - 10:21 Permalink

ur not annoying, I like no other person even reads what u post.


The only reason this is of interest to me is your near psychotic obsession that any person, in the billions of people in the world, cares what u write.


You provide interns with great in life training on how to observe psychotics and character disorders. Most likely borderline and narcissism in the case.


In reply to by ravolla

Anarchyteez ll951983 Wed, 06/13/2018 - 23:26 Permalink

ll951 u r an Asshat!


Back on topic:

“Bear in mind Gundlach alternatively signaled that a recession is possible by 2020, which could make the next presidential election “a wild ride," and notably reduce interest rates.”

There’s not a chance at that point of reducing rates. At that point it would incinerate the USD and au would finally hit 10K. 

The recession will start any minute for the midterms. So, wrong there too I believe. 

Rock and a hard place. 

In reply to by ll951983

Harry Lightning FishOn Wed, 06/13/2018 - 23:21 Permalink

The options bet was a little early, as I don't think rates peak until the futures contracts roll over next week. But I think they are on target, there should be a nice summer rally as the economy slows in the third quarter after a very hot second quarter. 

After that, look out. I expect a sharp rise in rates thereafter, and going into the end of the year we should see new high yields in longer dated US Treasury paper. It is that rise in rates that finally should kick the bar stool out from under the fat asses of the stock market, which means 2019 will be a very difficult year for stocks and a very good year for bonds. 

I doubt that US tens will see 6% anytime in the next three years. Maybe they get to 4%, at worst 5% during the sell off later this year. But then the ensuing recession will bring ten year yields back down to new lows, lower than where they traded in 2016.

If I have learned anything about the bond market its that trying to predict where yields will be more than six months into the future is a pure gamble. So for now, suffice it to say that sometime soon there should be a rather good drop in bond yields, nothing earth-shattering but surely noticeable, and those option positions should do all right for their owners. But after the coming 25 to 50 basis point drop in 10 year yields, a really nasty sell off will follow that will bring yields back to new highs for the year. That rise in yields will continue until the stock market finally surrenders (circa early 2019), which then drops long term yields to lower lows that seen in 2016 or at anytime during the financial crisis.

That's how I am looking to play it. We'll see if the market cooperates.

In reply to by FishOn

Yen Cross Wed, 06/13/2018 - 21:15 Permalink

 Gundlach is a fool. 

Money will be printed adfinium for eternity until the serfs rise and neutralize the credit system.

 What difference does it make, if you're printing money sideways with every other central bank on the planet?

 That's how these people think! 

  Inflation kills central banksters. Inflation kills societies.

 When a volcano erupts, the village dies because of inflation.

SkunkyBeer Wed, 06/13/2018 - 21:17 Permalink

Dumbest article I've seen on ZH in a while. DoubleLine has $100 billion AUM. Someone is risking $75MM Gundlach's wrong?


Betcha two nickels...


Quivering Lip Wed, 06/13/2018 - 21:48 Permalink

Monday saw the purchase of 100,000 contracts in a call-option spread on 10-year futures, for a premium of $45 million, targeting a drop to about 2.6 percent before the contracts expire on Aug. 24.

What are the strikes? 119-123 call spread?

Targeting 2.6%? If it's a call spread rates can go to 2% and the spread would still be worth the same amount.

Whoever wrote makes it sound like a butterfly. Or they don't know what they're talking about

InnVestuhrr Wed, 06/13/2018 - 23:13 Permalink

I also bet that Gundlach is wrong, am 100% in not just long bonds, but leveraged, and am earning more than 10% yield

I have ZERO worries about losing because the fragile economy cannot withstand higher rates and all the shit going on globally plus astronomically high stock market will inevitably result in the largest flight to safety in bonds in history - then I will sell all and make another fortune in long-term capital gains - after having collected high interest for years.

Investing is warfare with money instead of bullets, the smart and courageous prosper, the cowards get nothing and the dummies get killed.

shizzledizzle Wed, 06/13/2018 - 23:21 Permalink

I got a hunch that tells me they aren't worried because it isn't their money. Painful time to be a be a short because they won't be tolerated.

I am trying up my capital in quality land in a specific market. I feel like it is safer and more tangible than markets right now.

Good luck folks, I don't wish harm on anyone here (even if I don't agree). Protect your capital and wait for the wash out. It's coming. There will be opportunity again. 


Sam Spade Wed, 06/13/2018 - 23:43 Permalink

I like Gundlach and he's made some great short term calls, but never ever bet against Lacy Hunt regarding longer term trends.  Lacy is a goddamn boss and always, always the smartest guy in the room.

the Dood Thu, 06/14/2018 - 00:04 Permalink

I don't see the 4th hike happening for 2018, or if it does, it would be the mistake one. Market action always gets wonky whenever this 4th hike gets talked about. Not surprising for someone to place a 75mm contrarian position given the amount of shorts and expectations going the other way

Money_for_Nothing Thu, 06/14/2018 - 08:10 Permalink

The writing-is-on-the-wall. The only way out of the current stagflation trap is to inflate away debt. The US is closing the boarders (eg raising wages) and lowering COLA (eg lowering social transfer payments). US Treasury interest rates are being normalized for 5% nominal growth. 6% five year bond. Military spending is being increased to increase price inflation and wages and to deter foreign interference.