Gundlach: Odds rise that bond shorts could bring on the 'unthinkable'

Jeffrey Gundlach
Scott Eells | Bloomberg | Getty Images
Jeffrey Gundlach

Jeff Gundlach expects the yield on the 10-year Treasury to continue to slide, and he sees higher odds for a return to the 2012 all-time low of 1.39 percent because of the massive under-positioning in the bond market.

Gundlach, founder of DoubleLine and co-manager of the DoubleLine Total Return Bond Fund, told CNBC's that the 10-year yield is likely heading to just under 2.5 percent, but that there is now a 30 percent chance it could fall back to the 2012 lows. He initially gave odds of 10 percent when the yield bottomed in July 2012.

Gundlach was a presenter at the Ira Sohn Investment Conference in New York Monday. CNBC broadcast from the event.

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"It would seem to me without having too much economic weakness,or without too much difficulty in the world we could probably see the 10-year make it down to 2.50, 2.47, type of zone," he said. "It's getting kind of close. My viewpoint is to get through that level you would need some kind of psychological shift and some sort of macro event to make investors really want a flight to safety. The investment value down in the low 2s is pretty dubious."

The yield on the 10-year reached a low of 2.57 percent Monday, the bottom of a range its been trading in since January.

"Maybe a really hard slowdown in China could cause a change in attitudes and deflationary fears, maybe a hotter situation in Ukraine could cause those types of fear. Maybe just the GDP that came out at basically nothing in the first quarter," he said on CNBC's "Fast Money Halftime Report." "It just seems to be another year of high expectations dashed somewhere around the end of the first quarter, and here it happened again."

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Gundlach said a big problem for the Treasury market is the massive short position.

"If there is investor demand for 10-year Treasurys below 2.5, I think it's a paradigm shift and I think there will be a massive Treasury rally if that happens because of the huge short base that's been built," he said.

Traders have said one factor pushing yields lower, even after a strong April jobs report last Friday, is short-covering in the market.

"Treasurys are under-owned and there's a lot of shorts against it in unconstrained bond funds and ETFs. If those shorts get pulled, you could see a real scramble to Treasury rates. And who knows? Maybe we actually take out the unthinkable - the low of 2012," he said. "I said at the time it was a 90 percent chance that that was the low in bond yields in July 2012. I still think it was, but I think now it's only a 70 pct chance. I think the chances have gone up that we go lower in yield because of the massive under-positioning in the Treasury market."

—By CNBC's Patti Domm.