Stanley Druckenmiller says listen to the bond market. Here's what that means

Published Thu, Jan 27 202211:38 AM ESTUpdated Thu, Jan 27 202212:44 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

Legendary investor Stanley Druckenmiller said he will again be listening to the message of the bond market if the Federal Reserve backs away from its easy policies as promised. "What I find so exciting about yesterday is if the Fed now behaves as Chairman [Jerome] Powell suggested they will in the months ahead, we can now heed the message of the bond market again no matter what it may be," Druckenmiller told CNBC's Joe Kernen in an email shared Thursday morning on " Squawk Box ." "And pre the tampering period, the bond market and yield curve were certainly much better predictors of economic trends than me and 95% of economists," the investor noted. The bond market is often viewed by pros as the "smart" financial market. Traders watch the behavior of yields along the Treasury curve for guidance on economic direction. Spreads refer to the difference in yields between shorter- and longer-duration bonds, such as the two-year versus the 10-year. A widening spread suggests a strengthening economy, while contracting spreads may herald weaker times. Kernen also mentioned a conversation they had in the spring when the 10-year Treasury was yielding just 1.36%. At the time, Druckenmiller had said the bond market had no predictive powers because of the Fed's manipulation of the markets with its easy policy. On Wednesday, the Federal Reserve announced that it could raise interest rates soon. Economists expect the first hike in March. During his briefing, Powell emphasized that the central bank has no set path for interest rate hikes, and could move forward as quickly as needed. He also said the Fed will be discussing reducing the size of its balance sheet at the next several meetings. Druckenmiller, CEO of the Duquesne Family Office, said the Fed's "dropping of forward guidance" will allow it to respond to economic data in a timely manner. "As long as the Fed follows through on this, I will once again be 'listening to the bond market' in the months ahead, as I did my first 35 years in the business," Druckenmiller said. Treasury yields rose on Powell's comments on Wednesday afternoon, and traders in the futures market began to price in five interest rate hikes for this year. Prior to the meeting, the futures predicted only four hikes and the Fed had forecast just three for 2022. The 10-year yield, which moves opposite price, was around 1.81% Thursday. The benchmark yield climbed above 1.85% after the Fed's statement Wednesday. The nearly $9 trillion balance sheet more than doubled during the pandemic and was bloated by the central bank's purchases of mortgage-backed securities and Treasurys. While the Fed will end that program in March, it continues to add securities to the balance sheet as the assets it is holding mature.

Billionaire investor Stanley Druckenmiller.

Anjali Sundaram | CNBC

Legendary investor Stanley Druckenmiller said he will again be listening to the message of the bond market if the Federal Reserve backs away from its easy policies as promised.