In all fairness, Gundlach has been bearish on the 10-year treasury bond for some time now. Still, his timing wasn’t quite as good as yours truly’s.
Today he told CNBC he thinks the 10-year yield could rise by 100 basis points (1 full percentage point) before year end. If this were to come to pass I think it’s safe to say my “crash” warning would be validated.
For those that don’t fully understand bonds, here’s how a mere 1% increase in the yield on the 10-year would precipitate a crash in the price of the bond:
Today, you’re basically earning $18 for every $1,000 you invest in a 10-year treasury bond. This is how we calculate the yield: $18/$1,000 = 1.8%. However, if yields were to go up 1% then investors would have to revalue your bond with the $18 coupon. They would do so by dividing it by the going rate for a similar bond (2.8%). The math looks like this: $18/.028=$642.86. So after seeing rates rise a mere 1%, you would find yourself sitting on a loss of over $350 or 35%. Ouch.
Just for the sake of clarity, Gundlach didn’t say he expects this to happen, nor have I said as much. He merely said it “could” happen. But “could” is enough for me to advocate “playing defense” in the bond markets right now.