Gundlach predicts a 3% yield on the 10-year Treasury will spell the end of the bull market

Key Points
  • Bond king Jeffrey Gundlach sees a 3 percent Treasury yield as an ominous sign for risk assets like stocks and junk bonds.
  • The DoubleLine Capital chief thinks stocks will finish lower this year, countering most Wall Street forecasts.
  • Gundlach sees inflation as the market's principal threat.
Jeffrey Gundlach
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The best indicator of when the bull run in stocks will end could be coming in the bond market, DoubleLine Capital's Jeffrey Gundlach said.

In fact, the "bond king" thinks that should the 10-year Treasury note yield hit 3 percent, that would be an ominous sign for all types of risk assets, including both equities and high-yield bonds. The government debt benchmark was within 0.15 percentage point of that level in Wednesday morning trading.

"My idea that the S&P would go down on the year would become an extraordinarily strong conviction as the 10-year starts to make an accelerated move above 3 percent," Gundlach said Tuesday during a webcast, according to a Bloomberg report.

Jeffrey Gundlach breaks down his market outlook
Jeffrey Gundlach breaks down his market outlook

While most everybody else on Wall Street sees the market finishing higher at year's end, the manager of the $51.8 billion DoubleLine Total Return Bond Fund figures the will finish lower, potentially putting an end to a bull run that recently marked its ninth anniversary.

The index is up 315 percent during that span, including a 3.4 percent gain in 2018.

"My conviction on that is actually higher than my conviction right now on whether bond yields are going to break to the upside or downside," Gundlach said, according to a separate Reuters account.

The flagship total return fund is off 1.1 percent year to date, but is outperforming its peers and is in the 10th percentile of Morningstar rankings.

Gundlach warned that the rise in bond yields would come with inflationary pressures that the Trump administration is disregarding.

"Of course, inflation is inflationary. Of course, rising wage inflation — all things being equal — is inflationary," he said. "Yes, it's possible that some other sector of the economy could be incrementally deflationary and offset the rising wage inflation. But I don't see any reason to believe that that's the base case."

An inflation scare briefly caused a stock market correction a month ago, though it quickly subsided. Average hourly earnings rose 2.6 percent in February, a decrease from the 2.9 percent January mark that began the market scare. Also, Tuesday's consumer price index data showed headline inflation running at just a 2.2 percent pace, about in line with recent trends.

Investors also have continued to push money into both stocks and bonds.

Stock-focused funds have pulled in $108.4 billion in investor cash this year — though U.S. funds notably have lost $23.5 billion — while bond funds have seen just shy of $35 billion in new money, according to Bank of America Merrill Lynch.

WATCH: Strategists are watching rising bond yields closely.

Yields and inflation will continue to climb, says strategist
Yields and inflation will continue to climb, says strategist