Jeffrey Gundlach, chief investment officer of DoubleLine Capital, said mortgage-backed securities are trading cheap relative to corporate bonds and a better bet because of the elevated risk of defaults in high-yield debt.
“This would be a good time to be selling corporate bonds and buying mortgage-related bonds,” Gundlach told investors during a webcast Tuesday.
Mortgage-bond funds have lagged behind other sectors of the debt market this year. Gundlach’s $58 billion DoubleLine Total Return Bond Fund, which had more than 80% of its assets in mortgage-related securities as of Feb. 29, has returned about 2% in 2016, compared with a 3.4% gain by the Barclays U.S. Aggregate Bond Index, the main benchmark for the broader bond market.
In February, less than a week before shares of the SPDR Barclays High Yield Bond ETF, an exchange-traded fund tracking junk bonds, hit their 2016 low, Gundlach said corporate debt was a looming opportunity as prices continued to fall. The index fund closed Tuesday at $34.42, up 9.3% from its Feb. 11 nadir.
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Defaults in high-yield debt, especially loans to energy-related companies, are likely to rise, putting corporate debt as a category at higher risk, Gundlach said on Tuesday’s webcast. Junk has rallied with Treasury bonds because Federal Reserve Chair Janet Yellen seems less inclined to raise interest rates, he said.