Bond King Jeffrey Gundlach of DoubleLine Capital explains why he thinks it doesn’t pay for investors looking for yield to leave bonds and buy dividend stocks or REITs. Jeffrey Gundlach was on CNBC today, below are the video clips and transcript.
Don’t Make These Bond Mistakes: Jeffrey Gundlach
welcome back to the half. live today from post 9 at the new york stock exchange on this big fed day. we are back talking about the fed, interest rates, and stocks with doubleline capital ceo jeff gundlach. thanks for staying with us. i know you’re worried right now about some of the moves that bond investors have been making of late as they try and look for yield. what exactly are you worried about? well, the basic viewpoint is that the financial markets, and certainly bond alternatives, are all basically balancing somewhat precariously on a very narrowbase, which is 0% rate policy. everybody is trying to find ways of getting yield and find ways of avoiding what they think is a lousy asset class, and they’re wrong. bonds are not a lousy assetclass as we talked about in the last segment. but what people are doing is fleeing from bonds so far in the last several weeks into other asset classes like, you know, dividend-paying stocks earlier this year, into mortgage reits, into master partnerships.and as we talked about over a month ago when i joined you from the salt conference when i was at the new york stock exchange, this is going from the fire pan into the fire. it’s a fundamental mistake. the basic premise they’re operating under is, hey, i don’t want to own bonds because i think the yields are too low, and i think that that means they must rise soon, an i’m going to lose money in bonds. what they’re doing is fleeing into other asset classes like dividend-paying stocks, mortgage reits and the like. if you look at the bloodless verdict of the market, which is the price action of the past month or so or two months or so, while bonds have had zero or modestly negative returns, many of the so-called bond alternatives have had horrible returns. no doubt. look at mortgage reits. these are done some of them 20%. look at dividend paying stockswhich are underperforming. look at mlps. the problem is all of these things are balanced precariously on the low interest rate premise and if the low interest rate premise is incorrect, thesethings are going to fall more than bonds, which has been thetale of the tape over the past month or two. so don’t think that fleeing from bonds into these yield alternatives is some sort of low volatility, no risk proposition should you think that bondyields might rise. so that’s the issue. bonds have fallen less than most asset classes with the interest rate rise. that’s what i mean by out of the frying pan and into the fire. no doubt. don’t you think the price action you mentioned yourself over the last several weeks to a month that’s been so bad has forced people or prodded them to get out of some of those things that maybe they thought were good? that’s the first question. the second is how — yes. they have, right? it’s just a fact. they’ve seen reits fall, utilities fall, mlps fall. and the reason they fall so much, scott, is that people buy them naively. they think that they’re somehow not going to suffer from negative price action shouldthere be a modest yield rise, and yet when they start to fall, they say, oh, my goodness, i actually bought something that has downside potential. when it starts to fall, they panic and start to get out. that’s why these kind of peripheral bond surrogates end up being the worst possible investment if the premise thatyou’re using to buy them is actually right, that interest rates might rise modestly. investors have to be sensible about what exactly are the fundamentals underneath these so-called bond alternatives, and the truth of the matter is they’re actually more risky than the thing that they feel like they’re fleeing from. so that’s the point i have been trying to make for really all year and now people are feeling it in their pocketbook with these negative returns in so many of the asset classes that they thought would be some way of protecting themselves. let me — turned out to be a modest decline in bond prices. let me ask you for the folksthat are watching, probably everybody out there who wants tohave a diversified portfolio, how do you convince somebody tobuy a bond fund after they opened their statement and saw what happened in may? well, not all — first of all, i hope they open other statements, too, and notice that their brazilian stocks aren’t doing very well and their mexican pesos aren’t doing verywell. bonds are actually doing on a relative basis fairly okay.certainly my bond fund has done more than okay with a positiverate of return that’s decent so far year-to-date. so bonds aren’t that bad. now, the thing that you’re bringing up is interestingbecause it’s going to get even more interesting. one of the things i have been talking about for the past several months is that you wait and see what happens july 31st because come july 31st you will actually have bond statements that show negative returns possibly, depending upon what happens between now and then, but under the base case if things stay where they are, possibly bond fund statements will show negative one-year returns come july 31st because, as i talked about publicly in the middle of the july last year, i think that was the low in treasury bond yields at 1.38% on the ten-year. i don’t think we’ll see that again. so what will happen — we have to ask ourselves when people open their statements and they don’t just see a one-month return that has a negative sign in front of it, but they see a one-year return that has a negative sign in front of it. then what are they going to think because many investorsnaive lie believe that the one-year return of a bond fund is it’s forward looking yield. thankfully my total return bond fund has a significantly positive rate of return from july 31st of last year, but an index fund or a total bond market type of fund will have anegative return. it will be very interesting to see what investors do at that point in time. and july 31st is not very far away. so stay tuned on that one. i think that’s going to be a very interesting moment in time to see what really happens withpeople’s asset allocation, bonds, stock, commodity, currency and the lake. maybe you should clear your calendar early and come back july 31st. maybe the first week of august is the way to do it. you got to wait for the mail to show up on the third or fourth business day. check your schedule. one more question, steve weiss. i agree with you completely on yield equities. i agree with you on index managed bond funds. so you have to be active. but in fairness if you see yields back up say from 2% to 2.5%, that may not sound like much, but that’s also a majorprinciple loss, isn’t it? it depends on the duration of your bond fund. if you’re running a lower duration like we do in our totalreturn fund, you would only lose about a percent or two and youhave income against that, but, yeah, i don’t think — but, again, just to repeat what we said in the first segment, i really do not think you’re going to see 2.50% on the ten-year anytime in 2013. all right. jeff. it’s been great having you. we’ll see what happens a couple hours from now, what bernanke has to say, what the news conference delivers and we’ll all be reacting to it.you have another webcast next week on a fund you’re opening to the public. it’s your floating rate fund and if you want to find out more, make sure to check out that webcast. that’s next tuesday www.doubleline.com. jeff gunt lack, thanks again. we’ll talk to you soon. thanks, judge. great