DoubleLine Capital’s Jeffery Gundlach discussed his worries on the US Treasury yield curve de-inverting quickly. The decreasing differences have repercussions for the economy.
Gundlach warned that the de-inversion is a recession warning, not a recession watch. The economy will need an increase in unemployment to set alarm bells for investors. Investors may expect long-term yields to rise further. This will pressure the 20+ year Treasury bond (TLT). The 10-year Treasury (IEF) nearly broke above 5.0% last week before closing lower.
IEF’s yield is highly likely to cross 5% next. As it rises, it decreases the attractiveness of stocks. Bondholders could buy the 10-year Treasury and get 5% at a low risk. Already, selling accelerated for interest-sensitive sectors. This included utility stocks like Dominion Energy (D), NextEra Energy (NEE), and Consolidated Edison (ED).
The AFFO from REITs is less attractive. This sector fell again as income investors exited the sector and bought bonds. American Tower (AMT) and Crown Castle (CCI) are examples of REITs that are on a downtrend that started in late 2021.
Income investors who averaged down during those two years have lost heavily. The dividend yield of 6.88% on CCI stock is nowhere near enough to cover the loss.
The de-inversion is a negative development. Be wary of income stocks.