Jeffrey Gundlach, one of the most respected bond managers in the world with over $100B in fixed-income assets under management, fears that interest rates are going up.
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Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke to investors via a conference call on September 12. The focus of his talk was DoubleLine’s flagship Total Return Bond Fund, DBLTX. The slides from his presentation can be found here.
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“I’m not really bullish on bonds,” Gundlach said.
His team uses a scale from -2 to +2 to rate their bullishness on asset classes. Gundlach said he was at a -1 for the 10-year bond, adding that he was closer to -2 than to zero.
While discussing whether the yield on the benchmark 10-year Treasury would end the year at or below 1.5%, he said “I’m not in the 1.5% 10-year camp.” Gundlach predicted that “it won’t go below 2%.” It closed at 2.17% on the day he spoke.
This is not a new position for Gundlach. He said in his last webcast, on June 13, that rates were going up.
Treasury rates are being held down by a “relative value argument,” according to Gundlach. He explained that German 10-year sovereign debt is priced at 39 basis points, and he suggested that investors prefer the relative safety and higher yield of U.S. Treasury bonds.
“The rate is too low on the 10-year,” Gundlach said. “There will be more bias to go up.”
Shifting to discuss DoubleLine funds, Gundlach devoted a portion of the webcast to deride a Wall Street Journal article that he said claimed the performance of DBLTX had deteriorated in the last year. He showed that his fund had outperformed its benchmark (the Bloomberg Barclay’s Aggregate Index) and a mortgage index (the Bloomberg Barclay’s MBS Index) over the last year and the last five years. He showed this by looking at five metrics – total return, volatility, Sharpe ratio, downside risk and Sortino ratio.
Gundlach did not dispute the claim in the article that his assets under management declined in the last year. But he showed that its percentage decline was less than that of similar funds from PIMCO, JP Morgan and TCW.
“The wacko world of the press has it that somehow the fund is struggling,” Gundlach said. “That is a crazy mischaracterization.”
I’ll look at what Gundlach said about global markets, the Fed and other asset classes.
The great policy divergence
“Everyone is losing their minds in the dog days of the summer,” Gundlach said in regard to the divergence of policies pursued in the U.S. and in Europe. While the U.S. is raising rates and tightening its monetary policy, the European central bank (ECB) is pursing quantitative easing (QE) and keeping rates low.
But Gundlach said that Europe is the healthier economy based on GDP growth, inflation, retail spending and other metrics.
What explains the policy divergence? Gundlach said that Mario Draghi is worried about the fate of the E.U. and its periphery and “wants to keep experiment alive.”
“But he will need to change his rhetoric and will have to end QE,” Gundlach said, referencing Draghi’s statement that its QE will be done by the end of 2017.
Gundlach noted that we are already seeing this change. According to Gundlach, Draghi is no longer saying the E.U. is “having a hard time and is now saying it is making progress.”
Gundlach also said that German interest is currently being pegged (maintained at a specific yield by ECB monetary policies) and that it will need to rise.
The German yield will move to 1% pretty quickly, Gundlach predicted.
“That would be a catalyst for U.S. rates rising as well,” he said. “The U.S. and German 10-year yields move together.”
Gundlach called it “crazy” that European junk bonds have the same yield as a U.S. Treasury basket (the Merrill Lynch U.S. Treasury Index). He said that spread is typically 700 basis points or more.
By Robert Huebscher, read the full article here.