Gundlach’s Bond Market Outlook (and a Warning for Junk Bonds)
The first third of 2016 has been good for bond investors, but don’t expect that performance to continue for the remainder of the year, according to Jeffrey Gundlach. It has left many sectors of the bond market overvalued. In particular, junk bond investors should be wary of pending defaults and lower recovery rates.
Gundlach spoke to investors on April 12 to provide updates on the DoubleLine Total fixed-income asset-allocation funds. He is the founder and chief investment officer of Los Angeles-based DoubleLine Capital.
The slides from his presentation are available here.
The AGG index is up 3.4% year-to-date and on pace for a 10% gain for the year, Gundlach said. “There is no way that will happen,” he said. “If the bond market were on that pace, there would be problems in the global economy that would torpedo that rally.”
Some sectors, like mortgage-backed securities, are still undervalued, according to Gundlach. But many parts of the bond market are rich, and Gundlach fears that high-yield investors may be in trouble.
In Gundlach’s prior webcast, he said that investors in “risk assets,” such as the S&P 500, were exposed to 20% downside risk versus only 2% upside potential. Equites have risen 4% since then. He did not comment on them in this webcast.
I will review Gundlach’s outlook for the fixed-income market and its asset sub-classes, but first let’s look at his views on monetary policy and economic growth.
On March 29, while speaking at the New York Economic Society, Fed Chairwoman Janet Yellen said there wouldn’t be a rate hike in April. Following that, Gundlach said, the probability of a rate hike in June (when the Fed would next meet) decreased rapidly and is now about 18%; the September probability is approximately 38% and for December, it is almost a 50/50 proposition. All of these probabilities are significantly lower than when Yellen spoke in March, according to Gundlach.
In every other country, Gundlach said, rate decreases are ongoing and expected and, in some cases, those rates are already negative. Rates in most countries are down about 50 basis points year-to-date, he said. The exception is Greece, where rates have risen. In the peripheral countries – Spain, Italy and Portugal – rates may have stabilized, Gundlach said.
Many central banks have tightened prematurely, according to Gundlach and, in all of those cases, they have had to reverse and lower rates.
With forecasts for GDP growth near zero for this year, it’s unlikely the Fed will raise rates, according to Gundlach.
In all likelihood, he said, the Fed’s rate hike will be “one and done.”