Star bond manager Jeffrey Gundlach, CEO of DoubleLine, roused attendees of the Altegris Strategic Investment Conference with a bullish call on long-term bonds, which he says are poised for a “melt-up.”
The paean to U.S. bonds was a rare bright note in a markedly sober analysis of the woes of the U.S residential real estate market, which was the main subject of his address to more than 600 investment professionals meeting at the alternative investing firm’s annual conference in San Diego.
Noting that shorting long bonds was a popular strategy last year, Gundlach called long-term Treasuries “cheap” in a fixed-income universe of which Gundlach had little good to say.
“We are not positive on the relative value of investment-grade corporate bonds,” which have retraced a route back toward peak values, the DoubleLine manager said.
He also called municipal bonds “overvalued” compared with Treasuries, but did express enthusiasm for emerging market bonds. When those securities tanked in last year’s emerging markets mayhem, investors asked who would buy them again. Gundlach’s answer is that pension plans will, for which reason he remains bullish on the volatile bonds.
But in a world where investors earn just 2.9% on a Spanish 10-year bond, Gundlach argues that safe and high-quality 30-year U.S. bonds should not be yielding 3.4%.
“I think long-term interest rates will fall in 2014… the 30-year Treasury rate may have already peaked,” he said.
The DoubleLine manager sees the 10-year Treasury, which he says “has a massive resistance point at 247 [basis points]” as the key signal. “If it gets broken I think the melt-up starts.” The 10-year bond hit 254, or 2.54%, on Wednesday, close to Gundlach’s target.
Gundlach’s bullish bond call was a welcome respite in a lengthy refutation of housing market bulls who argue that it is now time for pent-up demand to re-energize a sector that has yet to return to its former glory.
Gundlach called this thesis “overbelieved,” and offered numerous refutations — firstly disputing the notion that U.S. consumers have deleveraged and can now start borrowing again. Gundlach says private and public credit stands at nearly $60 trillion, an all-time peak.
“There’s not going to be a resurgence of new borrowing,” he said, adding that levered-up consumers have already “destroyed their credit” and are not likely going to be able to obtain large loans.
Gundlach also noted that housing today is heavily supported by second-liens, now at a peak, indicating that consumers have limited resources with which to invest in the sector.
Much has been made of the surge of cash buying, now responsible for more than half of residential real estate transactions. That’s not a wholesome sign for housing, but worse, Gundlach says major investors like Blackstone are no longer buying at anything like their previous pace.
Meanwhile, existing home sales have fallen rapidly to exactly where they were at the depths of the recession — and that’s with all the new pools of money, he says.
New home sales have fallen back to 2012 levels, “little different from their level at the absolute depths of the recession,” he said.