August 16, 2011
The US bond market
While Europe faces a binary choice between default and inflation, the path for the US is far more predictable, according to Gundlach.
He said the US could face a Japan-like bond market, with 10-year bond yields as low as 1%, if the government continues to address the deficit in an incremental manner.
But most investors are not fully invested in the US Treasury market, he said. All but a few outperformed the Barclay aggregate index this year because they missed out on the rally in government bonds.
Gundlach said investors should “keep their eyes wide open” for a print-and-pay scheme from the US, which would lead to an increase in Treasury yields. But he said there are no signs of that from Washington.
Two mistakes to avoid
All investors should avoid two potential mistakes, Gundlach said.
The first is owning a money-market fund. The decision is really easy, he said, since those funds yield zero. “Just don’t own it,” he said. “Put the money in a T-Bill fund,” since money-market funds carry risk.
The other mistake to avoid is owning funds with counterparty risk. Gundlach said many large bond funds have significant counterparty risk in the form of credit default swaps and other derivative instruments.
“Anybody who is taking counterparty risk and is not getting paid for it is exposing themselves to potentially catastrophic losses,” he said. “Even if you think the possibility of that catastrophic loss is .01%, you shouldn’t do it, because you are being paid zero.”
Indeed, Gundlach advised taking a very conservative stance in the market.
He said the market just descended the “first hill of a roller coaster” with powerful losses in equities and equally strong gains in bonds. “The idea that this is about to reverse on a dime is just absurd. I’ve been at this game far too long. When you start to see the momentum work in this direction, it is not going to reverse on a dime.”
Gundlach said investors don’t need a lot of risk in their portfolios and that he did not have much personally or in Doubleline’s go-anywhere multi-asset fund.
The economy and the debt problem are bad, he said, and there are a lot of problems that need to be resolved. “As that happens we will calmly and hopefully be more right than wrong, make moves to capitalize and make profits while successfully protecting capital and making our way through the rapids.”
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