The Jeffrey Gundlach ratio is pointing to rising bond yields.
Jeffrey Gundlach, the chief executive of DoubleLine Capital, also known as the bond king, relies on one market-based predictor for bonds, it is known as the Jeffrey Gundlach ratio.
“Jeffrey Gundlach, the chief executive of DoubleLine Capital, also known as the bond king, relies on one market-based predictor for bonds, it is known as the Jeffrey Gundlach ratio”
The Jeffrey Gundlach ratio tracks the ratio of copper prices to gold versus the 10-year Treasury
So why copper and gold?
Copper has long been known as a bellwether for economic growth.
If you want a heads-up on just how strong the global economy is right now keep an eye on copper prices. Copper has a wide application ranging from electrical power, electronics, energy, petrochemicals, transportation, machinery, metallurgy, light, and other new industries and some high-tech fields.
Gold, on the other hand, is a precious metal that investors flock to in times of geopolitical and economic turmoil. In other words, gold is a safe-haven asset and its higher price is reflective of a bearish sentiment. Copper has industrial applications and higher copper prices suggest a bullish undertone for productive investments.
“The yield on the 10-year treasury was around 1.83% and it has dropped by 85 basis points since 2019”
The yield on the 10-year treasury was around 1.83% and it has dropped by 85 basis points since 2019.
Jeffrey Gundlach thinks that treasury yields are heading higher as the recession risks recede.
The Jeffrey Gundlach ratio suggests that capital flows will rotate from safe-haven assets such as treasuries and gold and into risk assets, cyclical stocks, copper
But the central banks’ injection of liquidity could also reduce the success of Jeffrey Gundlach ratio in predicting a rising 10-year bond yield.
While the Fed in recent months has been targeting the short end of the yield curve to the tune of $1.2 trillion per month to plug the repo market hole, other western aligned central banks have been actively buying the long end of the yield curve. In other words, if the European Central bank (ECB) and Bank of Japan (BoJ) and the Bank of England (BoE) are buying the long end of the yield curve then yields could continue to fall.
“Jeffrey Gundlach’s ratio is based on a market-driven fundamental and price discovery”
When considering Jeffrey Gundlach ratio investors/traders need to factor into the equation the net effect of the main central bank purchases of long term treasuries
What’s more, as gold investors have discovered to their frustration the central banks have unlimited firepower, through the issuance of fiat currency to manipulate the price of any asset at their will by actively trading in the derivatives market.
Put simply, the trajectory of bond yields most likely has more to do with the central bank liquidity injections and open market operations rather than Jeffrey Gundlach ratio.
Jeffrey Gundlach’s ratio is based on a market-driven fundamental and price discovery
Jeffrey Gundlach believes in the predictive value of the ratio since copper is sensitive to swings in the economy, while gold climbs when investors get frightened.
But Jeffrey Gundlach should add that gold climbs central bank permitting. Equally, long bond yields rise if the central banks decide they want it to.