September 11, 2018 / 10:19 PM / 7 months ago

UPDATE 1-Gundlach warns U.S. Treasury bond rally would lead to shorts 'stampede'

(Adds quotes from DoubleLine webcast)

By Jennifer Ablan and Trevor Hunnicutt

NEW YORK, Sept 11 (Reuters) - Jeffrey Gundlach, the chief executive of DoubleLine Capital, said on an investor webcast on Tuesday that if U.S. Treasury bond prices rally, there would be a “stampede” to cover a large amount of speculative shorts.

Hedge funds and other large speculators have been adding to bets against 10-year Treasury futures and ultra-long bond futures, bringing their net short positions to record levels.

Gundlach said the one-sided wager from speculators could lead to a “monumental short squeeze” if yields fall. “The speculative positioning against the Treasury market is simply off the charts,” he added.

“If something happens that is a catalyst for starting to get a rally going in bond prices and a decline in the 10-year (Treasury) yield, you could just imagine what kind of a stampede there would have to be to cover the shorts,” Gundlach said.

“That might be the way you get to 2.25 percent, if it ever happens. Of course, that would be at the long end. My suspicion is that the short end would be higher at that point ... we would get an inverted curve.”

An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality and is a widely acknowledged recession predictor.

Gundlach also said global economic growth was slowing and the next big move in the dollar will be down. He likened debt-financed U.S. budget deficits to Miracle-Gro plant food and remarked that the benefits of the ballooning deficit, stemming from tax cuts, were not permanent. (Reporting By Jennifer Ablan and Trevor Hunnicutt Editing by Chris Reese and Rosalba O’Brien)

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