Fear that the multi-decade bull market in bonds will end has centered on the benchmark 10-year Treasury yield breaching 3%. But Jeffrey Gundlach said that is the wrong focus. Instead, investors should worry if the 30-year “long bond” goes above 3.22%.

Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke to investors via a conference call yesterday. Slides from that presentation are available here. The focus of his talk was DoubleLine’s asset-allocation mutual funds, DBLFX and DFLEX.

“I am not that concerned about the 3% yield on the 10-year Treasury,” Gundlach said. “The 3.22% yield on the long bond is a bigger deal.”

“If the 30-year takes out that yield,” Gundlach said, “then the 10-year yield will break out upwards.” He said that the 10-year yield could then break 4% relatively quickly, which would be “problematic” for competing assets – specifically equities.

The 10-year yield last closed above 3% on April 24 and remained above that level for three days. It closed at 2.97% yesterday.

The 3.22% yield on the 30-year is significant, Gundlach said, because it is a “resistance” level that was last reached on February 21, 2018. It closed at 3.13% yesterday.

Rates will break to the upside, Gundlach said, but he qualified that comment as “not a high conviction forecast.” He said that investors should be reactive and “let the market play things out.”

“This is not a bad place to own bonds,” Gundlach said.

I will discuss Gundlach’s assessment of valuations in various sectors of the bond market. But, first, let’s look at what he said about the odds of a recession and the economic forces driving the bond market.