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Is Gundlach Wrong On 2-Year Notes: Some Thoughts From Bloomberg

After this weekend's mini tweetstorm by Jeff Gundlach on the fate of 2Y Tsys, here is a response from Bloomberg's macro commentator Wes Goodman.

Jeffrey Gundlach, the chief investment officer at DoubleLine Capital LP, says that it’s "very hard" to be optimistic on two-year Treasuries with yields at an eight-year high. He may have a point, but they still could be a haven amid a broad bond-market sell-off. 

Two year US Treasury yield at an EIGHT YEAR high, AND above the 1Q 2008 rally pivot point. Very hard to find a bull case for that puppy!

— Jeffrey Gundlach (@TruthGundlach)

While Treasuries may be poised to extend last week’s losses, two-year notes will probably dodge most of the declines.

 

As central bankers from Europe, the U.K., Canada and the U.S. have begun talking about the prospects for tightening, short-term yields should be roaring higher. And they are, in all those regions except the U.S.

 

The Fed has indicated it plans to raise rates once more in the second half of 2017. That would mark a slowdown in the pace from the one hike every three months since December. What’s more, traders aren’t convinced policy makers will even move again this year. The odds of a hike by Dec. 31 are barely 50%, based on federal funds futures and the effective rate as calculated by Bloomberg’s implied probabilities model.

 

At least some of the Fed tightening will come in the form of balance-sheet reduction, mitigating the need for additional hikes

 

The U.S. has a yield advantage, with the two-year at about 1.39%. The rates are about 1.10% in Canada, 0.36% in the U.K. and minus 0.57% in Germany.

 

Leveraged funds hold a net long position in two-year Treasury futures, even after some recent reduction.

 

Shorter maturities by definition don’t have the duration of longer-term debt, so losses will be limited if yields rise across the spectrum.

 

Gundlach commented in a Twitter post Friday that a jump in two-year yields had taken them past a technical hurdle set in the first quarter of 2008.