During an interview with Reuters, DoubleLine CEO Jeffrey Gundlach said that the current inversion of the yield curve (TLT) could signal that the US “economy is poised to weaken.” He added that the inversion at the short-end of the Treasury yield curve implies that the bond market doesn’t think the Fed plans to raise interest rates through 2019.
As we discussed in Yield Curve Inverts for the First Time since 2007: What to Know, the spread between five and three-year Treasury yields narrowed to -0.01 percentage points on December 5. The yield curve inverted for the first time since July 2007.
Yield curve inversion
The yield for a longer-dated maturity is usually higher than a shorter-dated maturity. When shorter-term security yields become larger than longer-term security yields, it’s referred to as “yield curve inversion” (BND). The narrowing spread implies that investors are concerned that short-term rates could fall, which implies an economic slowdown.
Markets are in panic mode
Bond markets seem to be concerned about future growth despite the recent 90-day US-China (SPY) (FXI) trade war truce. The euphoria from the truce is already wearing off as investors wait for more details about how the talks between the two sides could progress. On December 4, the stock markets took a deep dive. The S&P 500 (SPY) fell 3.4%, the Dow Jones Industrial Average (DIA) fell 3.1%, and the NASDAQ Composite (QQQ) fell 3.8%.
Gundlach added that the recent equity recovery could be at risk due to fundamental economic deterioration, which is “a message that is sounding from the junk bond market, whose rebound has been far less impressive.”
Next, we’ll discuss what Gundlach said about the Fed’s role as the yield curve threatens to invert.