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Portfolio > Portfolio Construction

Gundlach Unimpressed by Treasury Rally Given Stock 'Carnage'

By Katherine Greifeld and John Gittelsohn

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Ballooning U.S. debt issuance is capping gains in the Treasuries market even amid stock “carnage” that would typically boost bond prices, according to Jeffrey Gundlach, chief investment officer of DoubleLine Capital.

A global equity sell-off that’s seen major U.S. stock indexes erase 2018 gains has pushed benchmark 10-year Treasury yields to 2.88 percent, close to the lowest level since August.

While that rally should be stronger given the magnitude of the equity-market turmoil, crisis-era debt supply levels are making it difficult for yields to fall much lower, according to Gundlach.

“This isn’t much of a rally, given the carnage in global stock markets and given some of the real gut-wrenching movements in the S&P 500,” Gundlach said Tuesday on a webcast for his $47.5 billion DoubleLine Total Return Bond Fund. “One of the reasons for that is supply, which will continue to be an issue.”

Gundlach, whose Los Angeles-based firm oversaw about $123 billion as of Sept. 30, also said the Federal Reserve is unlikely to increase interest rates in 2019 and 2020 based on bond market indicators.

Keeping ‘Flexibility’

“The bond market thinks the Fed isn’t going to tighten at all in 2019 or 2020,” Gundlach said. “The Fed still wants to maintain some rhetoric of flexibility to tighten rates just in case they see the recovery in equity market values.”

The Total Return fund, which invests primarily in mortgage-backed securities, returned 1 percent this year through Dec. 10, beating 83 percent of its peers, according to data compiled by Bloomberg. The fund averaged 3.1 percent annual returns over the last five years, better than 88 percent of rivals.

In other comments, Gundlach said:

  • The federal deficit is expanding at a rate that’s unprecedented for a still-growing economy;
  • Emerging-market stocks are likely to outperform U.S. stocks over the long term; and
  • The U.S. dollar is likely to weaken.

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