Veteran bond fund manager Jeff Gundlach recently pointed us to the chart that he looks at when he gets up every morning.
It’s an overlay of the US dollar / emerging-market currency exchange rate and the yield on the 10-year Treasury note.
Gundlach noted that there has been a remarkably tight correlation between the two measures with the currency cross acting as a slight leading indicator of the 10-year yield, which is the benchmark for almost every important interest rate in the world.
Last month when he last spoke of this chart, the currency cross was signaling a decline in the 10-year yield. And as Gundlach correctly predicted, that yield has been tumbling toward the 2.5% level he targeted.
However, the correlation in this chart appears to have broken down.
Earlier today, Morgan Stanley’s Rashique Rahman circulated an up-to-date version of this chart showing the currency cross trending higher as the 10-year yield sinks (see above).
“You’re correct that the relationship has broken down after being nearly perfectly correlated last year,” Gundlach said to Business Insider today. “That’s why we’ve been following it: to see when and how it would break down. This breakdown suggests that the 2013 markets playbook will not be the winning playbook for 2014 — as evidenced, for example, by bonds outperforming stocks so far.”
During his January 14 webcast, Gundlach unveiled a series of contrarian market calls that have been doing quite well. His prediction that the 10-year Treasury note yield would fall flew in the face of Wall Street’s consensus for it to rise to 3.4%.
He also warned that the stock market appeared to be topping, which it did one day later. The S&P 500 is down nearly 100 points from its January 15 all-time high of 1,850.
Also, gold has been trending higher. Wall Street thinks it’ll fall to $US1,220. Gundlach sees $US1,350.