Gundlach says 10-year Treasury above 3% would drive down stocks

If the yield on the 10-year Treasury note breaks above 3%, there’s a high chance U.S. stocks will end the year down, according to Jeffrey Gundlach, chief investment officer at DoubleLine Capital.

“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%,” Mr. Gundlach said Tuesday during a webcast for his $51.8 billion DoubleLine Total Return Bond Fund.

Yields on 10-year Treasuries closed Tuesday at about 2.84%, down from their four-year high of 2.95 percent on Feb. 21. The S&P 500 Index closed at 2,765 on Tuesday, up 3.4% this year.

DoubleLine Total Return, which invests mostly in mortgage-backed securities, returned an annual average 2.6% over the past five years, outperforming 89% of its peers through March 12, according to data compiled by Bloomberg.

Mr. Gundlach, whose Los Angeles-based firm oversaw about $118 billion as of Dec. 31, said the chances of the 10-year Treasury yield exceeding 3% are increasing as U.S. deficits rise and the Federal Reserve reduces its balance sheet while raising its benchmark short-term interest rate.

Among Mr. Gundlach’s other comments:

• The U.S. deficit is likely to exceed $1.1 trillion in fiscal 2019 because of a combination of tax cuts and rising entitlement expenses. “It’s going to be more like $1.2 or $1.3 trillion,” he said.
• Leading economic indicators show no signs of a recession within the next 12 months.
• Core inflation is likely to increase above the Fed’s 2% target.
• Be prepared for further weakening of the dollar. “The odds are good that the next big move in the dollar is lower,” he said.