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Gundlach warns record bond speculation could cause big move in interest rates

Key Points
  • Widely watched bond investor Jeff Gundlach warns that the record level of short positions in Treasury futures could cause a squeeze if investors are forced to cover their positions.
  • That in essence means if rates are to fall, investors could be forced to buy, sending bond prices higher and yields lower.
  • Gundlach also points to the record long positions in the dollar.
Jeffrey Gundlach, founder and chief executive officer of Doubleline Capital LP.
Scott Eelis | Bloomberg | Getty Images

DoubleLine's Jeff Gundlach is warning that the record number of bets made in the futures market in favor of higher bond yields could "cause quite a squeeze."

Gundlach alluded in a tweet to the fact that net short positions in 10-year and 30-year Treasury futures are at record highs for noncommercial speculators. That could cause a swift drop in yields if rates were to start moving lower, and those investors were forced to cover their positions.

Yields move opposite price, and the bets against lower prices and rising yields, or short positions, have jumped as yields have moved higher this year.

"The [Treasury shorts] picked up pace after we broke 2.60 on the 10-year, " said George Goncalves, head of U.S. fixed income strategy at Nomura. "They might be the catalyst that causes a rally. If something happens and they give up on their trade, it's that their thesis didn't work and they're covering their shorts."

Gundlach, CEO of DoubleLine Capital, tweeted on Friday, but his comments were still getting lots of attention on bond desks Monday morning. The Treasury market was quiet Monday, with yields slightly lower. The 10-year was at 2.84, and the 30-year bond was yielding 2.99 percent.

"There's definitely a tug of war between real money and the speculative investors. Real money keeps getting long and speculative investors are short," Goncalves said. He said neither investor group is winning, as the 10-year is "stuck between 2.80 and 3" percent.

VIDEO1:3901:39
Treasury yields slip to bottom of recent range

Gundlach also tweeted about the "big long positioning in $" at the same time there's a massive short positioning in Treasurys and the S&P 500 is back at its highs "on diminishing momentum." CFTC data, released Friday, also showed that speculators raised net dollar bets to the highest since January 2017.

He ended the tweets with the comment, "Boom narrative post peak," suggesting to some that the market's late-cycle behavior could be seen as contradictory. The S&P 500 ended Friday at 2,850, 22 points from its all time high.

"What's being alluded to is it's going in diabolically different directions. The bond bears and the dollar bulls are using the same argument. They're constructive on the U.S. They're constructive on the dollar market," said Goncalves.

Gundlach's reference to the S&P comes as many strategists expect the stock market on Wednesday to break into its longest bull run ever, surpassing the streak set from early 1990 through late 2000. The S&P 500 is up more than 320 percent from its low in March 2009.

"He's saying if we're about to get a contrary move, and we're about to get a drop in yields, that could say something about growth expectations when the stock market is optimistic about growth," said Peter Boockvar, chief investment strategist at Bleakley Financial.

WATCH: Gundlach on whether we're repeating mistakes that caused Great Depression

VIDEO4:0904:09
Gundlach says he learned in elementary school that tariffs caused the Great Depression