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DoubleLine’s Gundlach: ‘We Don’t Like the Short End of the Curve at All’

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The legendary fixed-income manager Jeffrey Gundlach, CEO of DoubleLine Capital, joined Tom Keene on Bloomberg TV’s Surveillance Midday to discuss Europe, alpha and possible Fed moves.

Jeffrey Gundlach“There’s absolutely no reason to own any investment-grade bonds that are inside of three years, for sure, and maybe these days even five years is getting to that category because it just basically has no yield,” Gundlach (left) told Keene.

On Europe’s affect on mortgages and mortgage-backed securities:

“In the mortgage world you’re in the fixed-income world, and so you’re going to have price movement that moves along with fixed income and you’re trying to perform. But we’re using mortgages better than other bond sectors. So it’s tough now with treasuries at the long end on fire, and meanwhile junk bonds have been falling pretty much every day this week by a fair amount. So there’s a lot going on, and we have to think about that. The mortgage market, more than three-quarters of it, is Ginnie Mae and Fannie Mae and Freddie Mac. So that works like government debt, although it has the refinancing component that makes it more complicated. And then you’ve got the non-guaranteed mortgage market, which is over a trillion dollars. And that’s going to move around with credit. And people—people are not that focused right on the default risk of mortgages like they probably should be when you look at the high-yield bond market that’s getting kind of nervous.”

On his investing technique:

“I don’t believe in models. I’m a math guy, but what really means is that the way I think about things is space relations. It’s more of an abstract way of thinking of math rather than a bunch of Greek letters and formulas, which is more applied math. I think one of the reasons that we’ve been able to succeed at DoubleLine is we think about fitting portfolio pieces together kind of like a space relations problem. I used to—when we build portfolios, I have a funny phrase for it. I call it loading the dishwasher. If you have a dinner party, you’ve got tons and tons of dishes. How do you make them all fit in the dishwasher? That’s kind of the way we think of portfolios. Every—every asset class, every type of bond has a different risk, different reward, works differently with the economy. And so they sort of have a shape to them, and the idea is to fit them all together so that you don’t have any gaps.”

On where he’s making investments:

There’s absolutely no reason to own any investment grade bonds that are inside of three years, for sure, and maybe these days even five years is getting to that category because it just basically has no yield. A two-year treasury yielding 20 basis points, the way I look at it, it’s the same as cash. At DoubleLine, we don’t measure investment success in increments of 20 basis points. So cash and two-year bonds are basically the same thing. What’s a two-year bond that essentially yields the same as cash at zero? It’s a promise to get a suitcase full of cash in two years. I’d rather have a suitcase full of cash now, not in two years. So we don’t like the short end of the curve at all.

On The Fed holding rates low through 2014:

Ben Bernanke has pledged to keep short rates at zero, so it’s not like you’re going to be rolling out anything at higher yields any time soon. And of course, it’s just nonsensical to think that short-term interest rates are going up for the United States. Even if you’re a little worried about inflation, which the markets aren’t telling that story today, but if you’re worried about that, the Fed is not going to raise interest rates voluntarily to suppress GDP to fight inflation. The Fed probably wants inflation to go up. That’s the way out of this debt problem is to have some nominal GDP. Why in the world would you do a 1980s Greenspan or Volcker type of thing and raise interest rates to suppress nominal GDP, which is what you’re doing when you’re suppressing inflation? So you don’t buy short bonds today.


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