Bill Gundlach, chief investment officer of DoubleLine Capital, cites striking similarities between today’s bond market dynamics and those of 1995, as the Federal Reserve’s policy rate nears the yield on the 2-year Treasury. The convergence signals a potential shift in monetary policy trajectory.
- 2-year Treasury yield at 4.85% nears federal funds rate range of 5.25%-5.50%
- Historical parallels drawn to 1995, when Fed tightened before pivoting to cuts
- Yield curve spread between 2- and 10-year Treasuries narrows to 15 bps
- Markets now price in 75 bps of rate cuts by mid-2026
- Investor positioning shifting in bond ETFs like TLT and BIL
- Mortgage rates remain elevated at 7.2% average over past quarter
Bill Gundlach, founder and CIO of DoubleLine Capital, has increasingly emphasized parallels between the current U.S. bond market environment and the period of 1995, when the Federal Reserve began tightening policy amid rising inflation expectations. In a recent commentary, he noted that the 2-year Treasury yield, currently at 4.85%, has now approached the federal funds rate target range of 5.25%-5.50%, a rare alignment not seen since the mid-1990s. This convergence, Gundlach argues, suggests the Fed may finally be catching up to market expectations after a prolonged period of lagging behind short-term rates. The 1995 comparison is notable because it preceded a sustained period of disinflation and eventual rate cuts, as the Fed successfully cooled inflation without triggering a recession. Gundlach suggests today’s market conditions—characterized by sticky inflation, resilient labor markets, and a flattening yield curve—mirror those of that era, with the 2-year yield 15 basis points below the 10-year yield, a narrow spread indicative of market anticipation of future rate reductions. He highlighted that in 1995, the Fed raised rates by 225 basis points over 14 months before pivoting to cuts in 1996. This alignment between policy rates and short-term yields has implications for fixed income investors and broader financial markets. Bond ETFs such as the iShares 20+ Year Treasury Bond ETF (TLT) and the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) have seen increased activity, reflecting shifting investor positioning. Treasury futures markets now price in approximately 75 basis points of rate cuts by mid-2026, signaling growing market confidence in a dovish pivot. The stabilization of short-end yields may also relieve pressure on mortgage rates, which have averaged 7.2% over the past three months. As the Fed’s policy rate creeps closer to the 2-year yield, the risk of a sudden, sharp rise in rates diminishes, potentially supporting equity valuations, especially in rate-sensitive sectors like real estate and utilities.