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Billionaire Jeff Gundlach's yield curve inversion warning: 'these are reliable signals of economic trouble'

Kitco News

(Kitco News) Investors need to manage risks appropriately as yield curve inversions signal trouble ahead, said DoubleLine Capital CEO Jeffrey Gundlach.

Recession cues are getting worse, Gundlach tweeted this week, pointing to the 2-year and 10-year yield curve and the 5-year and 30-year curve inverting.

"In the UST Market: 2 year/ 10 year inverted 35 bp. 5 year/ 30 year inverted once again, five basis points right now," he said. "These are reliable signals of economic trouble. Risk manage accordingly."

A yield curve inversion happens when shorter-term Treasury rates move above longer-term yields. The market often considers the inversion of the 2-year and 10-year yield curve as a reliable preemptive sign of a recession down the line.

There were several attempts at inversion this year. Back in March, the 2-year and 10-year yields inverted for the first time since 2019. Then it happened again briefly in June. And since July, the curve remained inverted.

The yield on the 10-year Treasury was last at 3.264%, while the yield on the 2-year Treasury was at 3.52%. Meanwhile, the yield on the 30-year Treasury was last at 3.371%, while the yield on the 5-year Treasury was at 3.396%.

Recession fears have been growing since the Fed introduced its oversized 75-basis-point hikes in June. However, Fed Chair Jerome Powell's Jackson Hole speech from last week has renewed those concerns, doubling down on the risk-off sentiment in the marketplace.

During the speech, Powell remained hawkish and signaled that rates could remain higher for longer. He also warned that there would be "some pain to households and businesses," which "are the unfortunate costs of reducing inflation."

The Fed chair added that even after several aggressive rate hikes, it is not the "place to stop or pause." Neither did Powell rule out another 75-basis-point hike at the September meeting, reiterating that a lot will depend on the macro data released in the next three weeks.

Gundlach has been on recession watch since January. And back in March, he told investors to pay close attention to the inversion of the yield curve, stressing that it matters.

"Right on cue, the 'It Doesn't Matter This Time' white papers are coming out. Don't believe them," he tweeted.

During his investor webcast, Gundlach said the inversion of 2-year and 10-year yields successfully predicted economic downturns each of the past four times.

"An inverted yield curve ... would make a very strong case for recession," Gundlach said during the March call. "The increase in the 2-year Treasury yield has been virtually as steep as the decline during the lockdown."

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