Gundlach – The Bond Market Is At A Pivotal Point

April 14, 2015

by Robert Huebscher

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Jeffrey Gundlach turned defensive on the U.S. bond market at the end of January, almost precisely when yields were at their lowest point. Whether his outlook changes hinges on the direction of the 30-year bond and if it retests its low yield of 2.45%.

Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke to investors via a conference call on April 7. Slides from that presentation are available here. The 30-year bond closed at 2.52% on the day he spoke and closed at 2.58% on Friday.

“We are at a pivotal point in the market,” Gundlach said. “If the 30-year Treasury can find its way below 245 again we will see the other part of the bond market rally as well.”

He added, however, that if it fails to go below 2.45%, then investors should expect “choppiness” rather than a trend. He reiterated his base-case forecast for the bond market, which is that will close the year roughly where it began.

“I’m not really looking for higher interest rates,” Gundlach said. “I don’t really see any fundamental reason why they should be higher.”

“I wouldn’t be surprised if interest rates on Treasuries ended the year similarly to where they started,” he said. “Short-term interest rates will probably have a hard time going down from here. They have dropped so far this year, and I really don’t see them going lower.”

Gundlach devoted most of his talk to an assessment valuation in various sub-classes within the fixed-income market. Let’s look at which sectors he said were over- and undervalued. I’ll conclude with his forecast for actions by the Fed.

Bond market valuations

To measure relative valuations within the bond market, Gundlach and his team at DoubleLine have been using a methodology they originally developed about 20 years ago. He did not discuss the underlying specifics, but the result is a graph that shows the fair value for each type of bond over time, on a total-return basis, along with bands that depict one- and two-standard deviations of over- and undervaluation.

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