Jeffrey Gundlach on Bonds, Stocks and Gold
Jeffrey Gundlach is the co‐founder, Chief Executive Officer and Chief Investment Officer of DoubleLine Capital LP, a Los Angeles-based asset manager. He was formerly associated with TCW, where he was Chief Investment Officer and head of fixed income activities. Mr. Gundlach is recognized worldwide as a leading expert in mortgage-backed securities and investment asset allocation. Morningstar has nominated Mr. Gundlach for Fixed Income Manager of the Year multiple times, and he won the award for 2006. In 2009, he was nominated by Morningstar for Fixed Income Manager of the Decade. In December 2009, Mr. Gundlach and his long-term colleague Philip Barach co-founded DoubleLine Capital with more than 40 financial professionals from their former firm. DoubleLine today employs 50 investment, client service and administrative personnel. The firm manages portfolios invested in mortgage-backed, government, corporate and emerging markets securities, with investor participation via separate accounts and mutual funds. Mr. Gundlach is lead manager of the DoubleLine Total Return Bond Fund (DLTNX/DBLTX) and the DoubleLine Core Fixed Income Fund (DLFNX/DBLFX).
We spoke with Mr. Gundlach on August 31.
You recently reduced your position from “overweight” to “small underweight” in Treasury bonds, and you cited “divergent behavior across the yield curve.” Can discuss that behavior and the rationale behind your move?
One of the things that I have learned during 25 years managing money – longer than that now – is to pay attention not only to what seems to be happening macro-economically, in terms of data releases, policy trends and the like, but also how the market is reacting. I found that some of the most important turns in markets are accompanied by what we call “divergences in the market.”
For example, the Shanghai Index of Chinese stocks often now leads the United States stock market. In April, when the Chinese stock market was dropping fairly persistently, the US stock market was going up and staying firm at the highs of the year. That's what we call a divergence. You have a market (the Shanghai Index) that was acting badly and has actually been the dominant market. It signaled there could be weakness ahead.
When there is talk in markets about a trend – this is common in the currency and commodity markets – and people are repeating this trend as if it is gospel truth, that can fly in the face of easily identifiable facts. That's something to take notice of.
For example, last fall you couldn't read a newspaper, listen to the radio, or watch CNBC without hearing somebody say the dollar is dropping. The dollar is weak. The dollar is pushing to new lows. What was strange is that it wasn't true. The dollar actually had gone to a low in the second quarter of 2008, and all through 2009 it stayed above that low. You get this strange contradiction when people act like something is performing very badly – in this case, the dollar – but if you just look at the true nature of the market, you can see that’s not true.
Today that's true in the commodity markets with gold. People are acting like gold is pounding out new highs every single day. Yesterday it went up quite a lot. People were saying, “look how well gold is doing. Gold is the winning investment.” But the truth is, gold is not higher than it was in June. It's actually below its high in June. That's something to watch out for.
What does this mean for the bond market?
I like to watch how different parts of the yield curve behave. I'm not talking about short-term movements. I'm talking about major changes. The real orthodox low in bond yields occurred in late 2008. The stock market crashed, and the economy was melting down. The Fed responded with so-called quantitative easing, and started to buy Treasury bonds and mortgages. There was a huge decline in bond yields in the second half of 2008 culminating at the end of December of 2008, when the two-year Treasury got all the way down to about 75 basis points. The five-year Treasury got down to about 125 basis points, about a percent and a quarter yield. The ten-year got down almost to 2%, to about 206 or 207 basis points. The long bond, the 30-year Treasury got down to about 2.5%.
The market started to get better in 2009, as the “green shoot” mentality in response to the deficit spending propped up consumption and managed to normalize the markets a little bit. This year we started to go down in yield with the recovery flagging.
Now the two-year Treasury has gone down again in yield, and it has actually gone to a new low. It went lower than that 75 basis point or so level seen in late 2008, and now it's down to about 50 basis points. The five-year Treasury went almost all the way back down to where it was at what I call the orthodox low it made in December 2008, but it didn't actually match that low, and certainly didn't break through it. Basically it met it. The 10-year Treasury didn't even get really that close to its low in late 2008. It got to about 2.4%, and the 30-year Treasury only got down to about 350 basis points, almost a full hundred basis points away from its low.That's a classic divergence where part of the yield curve, the one that is controlled by the Fed, goes down to a new low, but other parts of the market don't corroborate that type of activity. The orthodox low in yields will ultimately prove to have come in late 2008.