On issues as central as the effect of quantitative easing or Fed tightening on interest rates, Jeffrey Gundlach says you shouldn’t trust the pundits on CNBC.
Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke to investors via a conference call on May 12. His call focused on DoubleLine’s two closed-end funds: DBL, which has duration of 8.1 and carries a high degree of interest-rate exposure, and DSL, which is an income-oriented solution that carries more credit exposure. In addition to its flagship bond fund, DBLTX, DoubleLine also offers TOTL, an exchange-traded fund (ETF), which just surpassed $500 million in assets.
The commentators on CNBC “don’t get it,” Gundlach said, in regard to statements that the recent spike in interest rates was due to fears of Fed tightening. “The long bond wants the Fed to raise interest rates,” he said. Although that is counterintuitive, Gundlach said it is the “Rosetta Stone through which you can translate the bond market’s movements over the past 18 months.”
“The bond market, in its cynical self, wants a depression,” Gundlach said.
Indeed, he said the recent rise in rates is due to decreased fear of a Fed rate hike.
The day he spoke, he said at least three people on CNBC made the same “idiotic statements” that disrespected history. Those people were puzzled why European interest rates were rising, Gundlach said, while Europe was engaged in quantitative easing (QE).
In the U.S., Gundlach said, rates rose universally when the Fed did QE. In Europe, according to Gundlach, rates are higher now than when European Central Bank President Mario Draghi announced the ECB’s QE.
I’ll look at what Gundlach said to expect from Fed policy and various sectors of the bond market, along with some other financial-media errors he cited.
Municipal bonds
Gundlach derided press reports (not necessarily from CNBC) that he had made a “big bet” on Puerto Rican municipal bonds. To the contrary, he has only a 1% position on those bonds in DSL, but intends to increase that “on weakness.”
He has bought Puerto Rican general-obligation bonds (GOs), but not pension-obligation bonds (POBs). He has avoided the latter because he can’t buy them in sufficient quantity for his funds. With a price of $37.6 and 6.20% coupons, Gundlach expects POBs to be safe for at least 1.5 years due to U.S. presidential politics. With those three coupons, investors can expect a good return even if the principal payments are restructured.
Similarly, he said his cost basis is low enough on GO bonds to ensure a good return.
He prefers municipal bonds to highly levered closed-end funds (his own funds aside).
High-yield bonds
Gundlach said the press has misquoted him as having predicted a near-term “disaster” for high-yield bonds. There will be no disaster this year or next, he said. Perhaps in three or four years there will be a “down cycle,” he said.
Gundlach said he has increased exposure to the high-yield sector, beginning 15 months ago. He is trying to find debt that is priced at $80 that can withstand $60/barrel oil prices. “There is not a lot of that debt,” he said.
The press likes to take statements and turn them into predictions of imminent danger, Gundlach said.
