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Portfolio > Mutual Funds > Bond Funds

Gundlach: Inflation Worries ‘5 Years Too Early’

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DoubleLine CEO Jeffrey Gundlach doubled down on his believe that interest rates are unlikely to rise in the near future on a webinar Wednesday.

“I’m virtually certain that Janet Yellen does not want to raise interest rates,” Gundlach said during the recent call.

(On Thursday, the Federal Open Markets Committee maintained its commitment to keep interest rates low for a “considerable time.”)

These comments build on what the bond expert said last week, when he predicted that the 10-year U.S. Treasury yields would stay between 2.2% and 2.8% for the rest of the year.

“That is the 2014 message: With all the chatter over tightening, short-term rates have gone up and long-term rates have down,” he explained. “The market is not terribly concerned on the long end.”

Yellen and others are watching inflationary pressures carefully, of course. But the idea that inflation is likely to provoke a big jump in interest rates is “at least five years too early,” he says.

In the short run, European bond rates have been coming down due to economic weakness and deflation, pushing investors into U.S. Treasuries, which are outperforming their European counterparts by 150 basis points in some cases, he notes.

Purchasing on the part of non-U.S. buyers of bonds is largely offsetting any effects on the market for tapering, Gundlach adds. This buying is up $600 billion year to date over last year.

As he said last week, the key indicators for bond investors to watch are European bond yields, “which I think have bottomed, but you have to watch to see if they rise substantially,” he explains.

Earlier, he described them as “impossibly low” vs. those of the U.S.

“U.S. bonds have only gone up a little bit and been profitable. Just because rates bottom out is not necessarily a reason to be terribly concerned. Watch for velocity, which we’re not likely to see before year end.”

Equity Markets, Other Issues

Asked about the impact of a stock sell-off over interest-rate concerns, Gundlach said, “If rates rise, it’s undebatable that it removes the zero-rate comparison and  must be viewed as a negative. It would be a challenge not just for stocks but for other assets.”

Again, he reminded webcast attendees that he isn’t looking for such a scenario to take place over the next six months.

“Five years from 2012, in 2017, the [Fed] will have to sell bonds to others or buy them again, as with quantitative easing, and that would pressure interest rates. In 2020, the deficit could have to be refinanced …spending on entitlement programs five years from now will be back up again because of demographics,” Gundlach explained. “The interest-rate fear crowd could be right, but it will take a few years.”

Winning Strategies

Discussing two DoubleLine closed-end funds, Opportunistic Credit (DBL) and Income Solutions (DSL), he shared his bullish view on dollar-denominated corporate emerging-markets debt. “This is my favorite,” Gundlach said.

“Since mid-2011 and on into 2014, I’m bullish on the dollar and … see it continuing to accelerate to the upside,” he explained. “It’s a mistake to own non-U.S. dollar currencies, pretty much across the board.”

Other key holdings in the closed-end funds include mortgage-backed securities and high-yield bonds.

“Yes, [some high yields] are volatile, but we got in at an opportunistic time,” the bond specialist said, adding that these holdings are up 6.4% so far in 2014.

The funds also have stakes in collateralized loan obligations, commercial mortgage-backed securities — which have generated “substantial profits” for DoubleLine, he says — and bank loans. 

Other Bets

Gundlach discussed one of the DoubleLine’s “big winners” last week as being convertible bonds, up 11% in 2014, after rising 26.6% in 2013.

He also pointed to emerging-market debt’s improvement of 10-plus% year to date, following its 2013 decline of about 5.8%. High-yield bonds are having a good year, with an uptick of over 5% year to date vs. roughly 7.4% for last year.

Keep in mind, Gundlach says, that 30-year treasuries year to date “are having their third-best return ” since 1974, according to Bianco Research. “What an interesting fact.”

“Why don’t we discuss buying into the rally in bonds? Because of low yields,” he explained on last week’s call, “but they bottomed two years ago!”


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