Jeffrey Gundlach on Bonds Prediction, Interest Rates and High-yield securities

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Jeffrey GundlachInterview with the Bond’s King

Jeffrey Gundlach in an interview at CNBC said that “when it comes to what effect the Fed quantitative easing measures or the interest rates tightening would have, pundits, opinions of pundits are not to be trusted”.

Gundlach founded Los Angeles investment firm, DoubleLine Capital, and is also its Chief Investment Officer. Double line’s instruments include: the DBL two closed-end funds of Doubleline, which has a high level of interest rate exposure and 8.1 duration; DSL, an income solution with a high degree of credit exposure, bond fund, DBLTX, and TOTL, which is an exchange-traded fund (ETF) having assets more than $500 million.

According to Gundlach, CNBC commentators just have not understood yet, talking about allegations that fears of Fed tightening is what has caused the recent interest rates spike, he noted, “Long term bond in the market is being placed under pressure for an interest rate spike, but that would be counterintuitive. The bond’s market mood can better be translated by looking at how the Rosetta Stone has been performing in the last 18 months.”” In itself, the bond market is seeking for a depression,” he added.

The currently observed interest rate spike has happened because investors’ fear of a Fed rate hike has decreased. On CNBC, Gundlach noted, three individuals are baffled why when all the countries in Europe are implementing quantitative easing (QE) measure, the interest rates in Europe are continuing to rise. Such thoughtless statement disrespects history.

When the Fed of the United State implemented QE, globally we saw rates increase, Gundlach noted. Interest rates in Europe are higher at present than when Mario Draghi, President of European Central Bank, had implemented QE, he added.

From Gundlach view point, it is to anticipate that certain bond market sectors, the Fed, and certain financial media would occasionally make errors.

Municipal Securities

Contemptuous press reports (not from CNBC) stated that Gundlach had placed a tremendous stake on municipal bonds of Puerto Rico only to be revealed that the stake was just for a 1% position placed in DSL, but has the intention of increasing the stake should weakness occurs.

The bonds he purchased are the general-obligation bonds (GOs) of Puerto Rico, not the pension-obligation bonds (POBs). The POBs he circumvent purchasing because they could not be obtained in quantities sufficient enough for his investment company. A coupon having a rate of 6.2% and of 37.6, according to Gundlach the POBs for the next 1 ½ years are a safe investment mostly because of the coming presidential politics in the US. A very good ROI can be expected by investors who acquire those three securities regardless if the initial payments are restructured.

Also, Gundlach added that the cost of GOs is quite low which should provide adequate return. For preference, he favours municipal bonds more than closed-end funds highly levered (to the exception of that of his funds)
High-yield securities

Gundlach in a statement noted that he had been misinterpreted by the press in regards to having made prediction of a “disaster” of high-yield securities in the near term. He added that for this year and the following, he does not foresee any disaster; probably a “down cycle” can be expected after 3 to 4 years.
Since almost a year and a half, Gundlach noted that his exposure in high-yield securities increased. His aim is to find a price of $80 debt which would be enough to withstand oil prices up to $60/barrel which according to him are few in the market. He also noted that the press often would take a statement and announce it as if it was an imminent danger prediction.

Other market sectors

According to Gundlach, debt offered in emerging markets with the denomination in dollars are well worth looking into since the hike of the dollar stopped which occurred because the Fed started being worried about the strength of the dollar affecting export. Most of Gundlach exposures in emerging markets are from the purchase of commodities.

With regards to India, he regards the country long term prospect to be positive as such has included it on his “weakness” exposure.

If a stock isn’t falling, then it would be rising he noted. Gundlach remains bullish with regards to gold which for the last two years the price has increased substantially. Silver on the contrary remain with a bearish outlook, but it is good for inflation.
Gundlach has a more positive outlook for the REIT market, even more than before. The securities of bellwether (NLY) are being given at $9, which is about 23% of discount, an all time low. In the short term Gundlach notes, the risk is for the rates to increase which would be harmful for REITS taking account of the leverage, which in comparison to closed-end funds is a lot higher.
A day prior to Gundlach giving his statement, a painting of Picasso sold at a record setting price of $179.4 million. According to Gundlach, such enormous prices can be sustained to the extent that the world continues to attract billionaires from China and Russia who are able to transfer the cash quickly. “Most of the high prices are found in the high end trophy market; median prices are weak, and that also applies for the New York townhouse co-op market.

Interest rates

The market mood is such that the Fed may let the economy become a bit overheated before doing something, therefore investors for at least six months, should not worry about short term interest rates increases, Gundlach noted.

For this year, the bonds market will see a lot of choppy action. Even with increased volatility, Gundlach predicts that the 10-year bond prices will be almost at the same level come year’s end. At 2.36% the support he very strong he notes. “It would surprise me if the 10 year went up to 2.50%, it should finish the year around 2.17% about where it began”.

Gundlach does not expect also another interest rate “leg down”. Since the end of January, Gundlach has been reducing his odds on that since the30-year bond rejected its 2.45% low.

The current increase in the Italian and Spanish yields and the move up by 60 basis points of the German yields makes it hard, according to Gundlach, to have a tremendous decrease to new lows in the foreseeable months.
“I am ready to put a high stake that the German rates would not fall back to 5 basis points,” he noted, and that in the coming months, they could be found up to 1.0% to 1.25% for the 10-year.

Pundits made an additional misstatement Gundlach said.

A lot of analysts have made the comparison of 2015 being like 2013. Then, the “taper tantrum” caused a lot of volatility in the bond market, and some expressed their fear that the Fed could be badly tightening bodes with regards to the treasury market.

“Yet many analysts overlooked the fact that the most performing sector at the time of “taper tantrum” was that of treasury bonds. GNMAs, Corporate, high-yield emerging bonds performed a lot worst. For this year, Gundlach said, emerging market debt and yield are performing fantastically, that is the reason why he isn’t seeking for a “bond market rout”.

Mr. Gundlach is the Chief Executive Officer and Chief Investment Officer of DoubleLine. He is recognized as an expert1 in bond and fixed income investments. His investment strategies have been featured in leading publications including The New York Times, The Financial Times, The Wall Street Journal, USA Today, Barron’s, Forbes, and Fortune. In 2010, Mr. Gundlach was named to the SmartMoney Power 30. In 2011, he was featured as “The King of Bonds” in Barron’s, and named one of “5 Mutual Fund All-Stars” by Fortune Magazine. In 2012, he was named one of the “50 Most Influential” by Bloomberg Markets magazine. In 2013, he was named “Money Manager of the Year” by Institutional Investor. He is a graduate of Dartmouth College summa cum laude holding a BA in Mathematics and Philosophy. He attended Yale University as a PhD candidate in Mathematics.

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