In his monthly must-see live webcast this week, DoubleLine CEO Jeffrey Gundlach made one very specific call (among others) that stood out to many listening in on the call.
Having explained that the combination of rising U.S. interest rates and fiscal deficits is like a "suicide mission" - which notably escalated the intensity from last month when he referred to the trend as a "pretty dangerous cocktail" - Gundlach concluded that the debt burden will rise to such a level that borrowing costs will surge.
To be specific, Gundlach said, the 10-year Treasury yield would rise to 6% by 2020 or 2021 adding that "we're right on track" for that.
That would be the highest yield since 2000..
Bear in mind Gundlach alternatively signaled that a recession is possible by 2020, which could make the next presidential election “a wild ride," and notably reduce interest rates.
Judging by the record short positioning across the Treasury complex, there are plenty that agree with him...
However, not everyone agrees. Lacy Hunt, the well-known bond bull at Hoisington Investment Management, told Bloomberg in an interview that:
“I believe that we're closer to the peak - or at the peak - at the longer end of the market."
"You come in and undertake a massive increase in debt, and the economy gets a transitory boost in economic activity. The consumer has already spent a lot of the tax cut, but the debt lingers.”
And additionally, this week saw someone place a large $75 million options bet that Gundlach is dead wrong and in fact 10Y Treasury yields tumble back to 2.60% first.
As Bloomberg reports, over the first three days of this week, traders paid more than $75 million combined to buy almost 200,000 call options on 10-year futures.
Monday saw the purchase of 100,000 contracts in a call-option spread on 10-year futures, for a premium of $45 million, targeting a drop to about 2.6 percent before the contracts expire on Aug. 24.
Traders plowed into bullish options bets again Tuesday, purchasing 50,000 calls for a premium of about $20 million, targeting a drop in yield to 2.9 percent or lower by July 27.
And on Wednesday, traders added to that bet by purchasing 40,000 call-spread contracts for a premium of $12.5 million, with maximum upside reached on a drop to 2.6 percent.
Overall the position has around a $3m/DV01.
Coming just weeks after 10-year yields set an almost seven-year high above 3 percent, the bets amount to a bold call targeting a drop to as low as about 2.6 percent before the biggest chunk of the contracts expire Aug. 24.
And whoever this bullish bond options BSD...