Gundlach – Beware of CNBC Pundits
May 19, 2015
by Robert Huebscher
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.
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).
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.
Other sectors of the market
Gundlach is quite positive on dollar-denominated emerging-market debt since the dollar stopped rising. That happened, he said, when the Fed “blinked” and started worrying about export weakness.
He said most of his emerging-market exposure is commodity based.
As he has said in the past, Gundlach is positive about the long-term prospects for India and has added to his exposure “on weakness.”
“What can’t go down must go up,” Gundlach said. He is therefore bullish on gold, which has not moved substantially in the last two years. He said he is not bullish on sliver, but that it is a “great inflation hedge.”
Gundlach’s said his outlook for the REIT market is “more positive than it has been in a while.” Prices are down, he said, with the bellwether security Anally (NLY) recently trading near $9. It is at a 23% discount, he said, near its all-time high. But, he noted, there is risk. If short-term rates were to rise, REITs would suffer because of their leverage, which is much higher than in closed-end funds.
The day before he spoke, a Picasso painting set a record when it sold at an auction for $179.4 million. Gundlach said those high prices are sustainable “as long as the world continues to mint new billionaires in Russia and China who can’t get their money out fast enough.” High prices have been concentrated in the high-end “trophy” market he said; median prices are not strong. The same is true, he said, of the New York townhouse co-op market.
For the next six months, Gundlach said investors should not fear rising short-term rates. The “psyche of market,” he said, “has gotten to the point that Fed will allow economy to run a little hot.”
He reiterated his forecast that there will be “a lot of chop” in the bond market this year. Despite higher volatility, he predicted that the 10-year bond will finish the year roughly where it started. There is a lot of support for it at 2.36% he said. “I would not be surprised to see the 10-year push to 2.50%, but it will end the year closer to 2.17% where it began.”
He also doesn’t expect another “leg down” interest rates. Gundlach said he has been decreasing his odds of that since the end of January, when the 30-year bond rejected its low of 2.45%.
With recent increases in Spanish and Italian yields, and with German bond yields up to 60 basis points, Gundlach said it was “hard to frame a big move down to new lows in the months ahead.”
“I would bet a lot of money that German rates are not going back to 5 basis points,” he said, and that they could head to 1.0% to 1.25% on the 10-year “in the months ahead.”
Gundlach called out pundits for one more misstatement.
Many analysts, he said, have compared 2015 to 2013. That year, the bond market experienced volatility from the “taper tantrum,” and some have said that current fears of Fed tightening bodes poorly for the Treasury market.
“But most analysts missed the fact that Treasury bonds were best-performing sector during the taper tantrum,” he said. Corporates, GNMAs, high-yield and emerging-market bonds did much worse, according to Gundlach. This year, he said, high-yield and emerging-market debt are doing great. That is why, he said, he is not looking for a “bond market rout.”