GUNDLACH: ‘Markets have been coiling’ and there’s one big thing that could unleash volatility

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Jeffrey Gundlach of DoubleLine Capital thinks you should be keeping an eye on the 10-year Treasury as you await market volatility.

To “bond king” Jeffrey Gundlach, the market hasn’t simply been sitting still. It’s been coiling.In other words, under a seemingly placid surface, the co-founder and
CEO of DoubleLine Capital sees conditions brewing that could eventually
unleash price swings upon a market so starved for them.

As for a potential trigger, Gundlach has singled out the 10-year Treasury note.

“One way or another, it’s going to have to break,” Jeffrey Gundlach,
co-founder and chief executive officer of DoubleLine Capital, said in an
interview on CNBC. “I think it’ll break to the upside. If it happens,
that will introduce volatility into the market.”

He’s specifically eyeing a threshold at 2.42%, a level that hasn’t
been breached since March. The 10-year sits at 2.27% as of 1:14 pm ET on
Tuesday, and has tested but not exceeded 2.42% on two separate
occasions in the past five months.

“It sounds like you’re calling a bond yield-fueled stock market correction,” replied interviewer Scott Wapner.

While Gundlach did not repeat the phrase back to Wapner, he simply
replied “yes,” before diving into his views on the stock market, as well
as the CBOE Volatility Index — or VIX — which serves as a fear gauge for the S&P 500.

Gundlach made waves two weeks ago when he purchased some five-month put options on the S&P 500, calling it “free money.”

He expanded upon the trade and those comments on CNBC, stressing that
the investment was less of a bear call on the S&P 500, and more of a
bull call on the VIX, which has sunk to record lows in recent weeks. It
traded as low as 9.52 on Tuesday.

“With all of the shorting of the VIX that’s out there, I think you
could have a big shock higher from offsides positioning,” he told CNBC.
“When we get whatever correction is coming, the VIX will easily go to
20.”

The way he looks at it, stock market volatility is so low right now
that the S&P 500 only has to drop 3% by the time the options expire
for the trade to be profitable. He thinks that should be enough to spur
an outsized VIX move.

“I’ll be surprised if we don’t make 400% on those puts,” he said,
before trotting out what’s quickly becoming his new catch phrase. “Going
long the VIX is free money.”

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