While people tend to flock to the DoubleLine Capital conference calls, I’ve always been more interested in tracking the bonds that they buy from month to month. After all, with AUM in the Total Return Fund now exceeding $27bil, they need to be buying a TON of bonds. Where do they see value? How does that fit in with housing and macro views?
In retrospect, the fund has changed a lot over the past two plus years. When the fund opened in March of 2010 the 10yr was over 3.5%, and non-agency MBS prices were generally much lower across the board. With rivals fretting about “who will buy all of those treasuries”, DoubleLine prudently bought a large amount of duration in the form of last cash flow Z CMO’s at deep discounts. The key rate duration of these type of bonds were tied to the 10-30yr part of the UST curve, and they obviously rallied tremendously as the 10 & 30yr now sit at 1.66% and 2.75% respectively. Today’s rate environment is very different and so are the opportunities in fixed income.
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The relatively stable loss-adjusted yields produced by non-agency MBS are still available, but they’ve come in with the overall yield chase. Furthermore, with billions going into the total return fund each month it becomes more difficult to source as attractive bonds as it was when the asset base was a fraction of today’s size.
What are they buying today with these massive inflows?
After reviewing the fund holdings of DoubleLine Total Return Bond(MUTF:DBLTX) as of May 31st, 2012, a few purchases were notable. DoubleLine added over $1bil of newly issued 20yr 3.5% pools and nearly $700mil of 30yr 4% jumbo pools. The 3.5% pools are borrowers with a rate of ~4%. Looking at total issuance for May, it appears DoubleLine bought about 1/3rd of the total issuance of these bonds. This collateral has been pretty slow with prepays generally under 10c. Not a super sexy bond, as it will likely yield somewhere in the 2.30%-2.60% range with a spread of ~1.35% over USTs, but the bond would be a strong performer if rates continue to fall and/or QE3 comes around.
By David Schawel, CFA of Economicmusings