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

“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.