DoubleLine’s Gundlach Bought Agency MBS in Recent Days
Jun 25, 2013
By Min Zeng
High-profile bond fund manager Jeffrey Gundlach has scooped up agency mortgage-backed securities in recent days as many other investors rushed for the exits.
Gundlach, the founder of investment firm DoubleLine Capital and co-manager of the $39.4 billion DoubleLine Total Return Bond Fund, told The Wall Street Journal Tuesday that the recent big selloff, which sent bond yields much higher, represents a buying opportunity.
“We have been buying modestly in recent days and will probably increase exposure when the market settles down,” said Gundlach. “A few months ago if you bought MBS, you got a yield of 1%. Now you can buy agency MBS of 4%.”
Gundlach believes the selloff in the financial markets since the start of May, driven by fears over the Federal Reserve cutting back on monetary stimulus, is now closer to having run its course.
He argues that it is a better time to buy bonds because investors not only now get higher yields, but signs of deflationary pressure would add to the value of income-generating bonds. Inflation has remained low in the U.S. despite the monetary stimulus provided by the Federal Reserve since the financial crisis.
Typically, when prices rise and inflation is an issue, the value of existing bonds declines.
“There is a disconnect between rising bond yields and falling inflation concerns,” said Gundlach. “It makes bonds doubly attractive. Investors would probably deeply regret exiting bonds and moving to cash.”
Gundlach bets that benchmark 10-year Treasury yields could peak in July with a level around 2.75%. He doubts the yield could top 3% this year because a 2.75% yield would send mortgage rates to 5.5%, a level that could dramatically reduce housing affordability for potential buyers. The 10-year note fell 12/32 in price Tuesday, sending the yield up to 2.595%, near a 22-month high set a day earlier.
But Gundlach says he wouldn’t be a buyer of Treasury bonds because, despite the selloff, they have fallen less compared to such riskier assets as corporate bonds, MBS, emerging market stocks and bonds, which have tumbled more in the market rout of the past few weeks.
Gundlach said he believes that on a relative value basis, assets that underperformed Treasury bonds would be more attractive to buy. Besides agency MBS, which he favors the most at the moment, he also found dollar-denominated emerging market corporate bonds as another attractive asset to buy.
Gundlach and Gross are long only bond managers. Of course they are buying bonds and of course they are aren't going to advise their clients that they should sell all of their holdings and move it elsewhere.
all i'll say is that Gundlach has said many many many (often contrary) things over the past month and even since the last Fed meeting. He was on cnbc the day of the Fed meeting saying that treasuries would rally and yield would drop to 2% .... well we all know what happened. then - last week he said - 'the bond mkt is broken .. can't buy bonds here' - and then yeah - yesterday - he's calling a top again. of course, his comments suggest the 10 yr could go to 2.75%. well - if it does - there will be panic in streets.
Bottom line is that guys like Gundlach, Bill Gross, Cramer etc. - they say alot of things often .... some of what they say has to turn out to be correct at some pt for some period. what we've seen, however, is that they are worong at least as often as they are right.