Gundlach Weighs 100-Times Levered Bet Against German Bonds

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Jeffrey Gundlach
DoubleLine Founder Jeffrey Gundlach. Photographer: Scott Eells/Bloomberg

DoubleLine Capital’s Jeffrey Gundlach said he’s considering making an amplified bet against German bonds to join a growing group of top money managers wagering against the debt after some yields turned negative.

“Let’s say you leverage up the German two-year 100 times, that’s a 20 percent return,” Gundlach said in a Bloomberg Television interview with Erik Schatzker on Tuesday at the Milken Institute Global Conference in Beverly Hills, California, referring to the potential short.

Since September last year, the pool of European bonds that essentially charge investors to own them has almost tripled to 2.8 trillion euros ($3.1 trillion) from 1 trillion euros, according to Bank of America Corp. data. The increase has been driven by central banks buying bonds to stimulate economies and has sent yields on German two-year notes to minus 0.273 percent, according to data compiled by Bloomberg.

Last week, Bill Gross, who ran the world’s largest bond fund until last year, called the 10-year German bund the “short of a lifetime.” Billionaire hedge fund manager Alan Howard said yesterday at the Milken conference that it’s “just crazy” to hold bonds with negative yields.

Gundlach said his Los Angeles-based firm is considering the German bond short for some of its riskier strategies. The investment would require borrowing money and putting capital aside for margin calls, he said.

Summer Insects

DoubleLine, which manages $73 billion, has bought high-yield bonds after owning almost none at the end of 2013. They’re reasonably attractive after last year’s plunge in oil made some of the securities cheap, he said. The debt “will probably do all right” in the next year or two as interest rates stay low, he said.

Gundlach warned that the high-yield market hasn’t been tested in a rising rate environment and that appetite for the debt may fall when borrowing costs rise.

He likened junk bond investors in a rising rate environment to “summer insects,” a reference to the Chinese Daoist philosopher Zhuangzi, who said a summer insect cannot understand ice because it’s bound to a single season.

Gundlach also said he likes emerging market debt and expects a boost for the securities from a weaker U.S. dollar.

Gundlach’s $46.4 billion DoubleLine Total Return Bond Fund has advanced 7.9 percent annually over the past five years to beat 99 percent of peers, according to data compiled by Bloomberg.

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