
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.
In order for the correlation to be restored, the long-term Treasury yields will have to rise or the currency cross will have to tumble.
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