Gundlach Says the Fed Might Regret Raising Rates

CNBC Events - Delivering Alpha 2015

DoubleLine CEO Jeffrey Gundlach

Photographer: CNBC/NBCU Photo Bank via Getty Images
  • `We're looking at some real carnage in the junk-bond market'
  • Central bankers could end up in a `conundrum,' manager says

Jeffrey Gundlach, whose $51.3 billion DoubleLine Total Return Bond Fund has outperformed 99 percent of peers over the past five years, said the Federal Reserve may come to regret raising U.S. interest rates amid signs of a fragile economy and a crumbling credit market.

The Fed is likely to find itself in a “conundrum” in a year or two if it raises rates amid economic trouble, Gundlach, chief executive officer of Los Angeles-based DoubleLine Capital, which manages about $80 billion, said during a webcast Tuesday. The central bankers appear “hell-bent” on lifting rates despite weak economic signals such as gross domestic product, he said.

“We’re looking at some real carnage in the junk-bond market,” Gundlach said. “This is a little bit disconcerting that we’re talking about raising interest rates with the credit markets in corporate credit absolutely tanking. They’re falling apart.”

Gundlach cited several danger signs in the U.S. economy that he argued make it a bad time to raise rates. Manufacturing has slowed as the dollar strengthened. Corporate profit margins have plateaued. High-yield bond spreads have widened and an exchange-traded fund of junk bonds had its lowest close today in more than six years.

“It’s possible the Fed pulls another Lucy and the football,” he said, referring to the “Peanuts” cartoon character who yanks the ball from would-be kicker Charlie Brown. If the Fed does act next week, a quarter-point increase is likely, according to Gundlach.

Fed Odds

Traders place an 80 percent probability that the Federal Reserve will raise rates next week for the first time since June 2006, according to data compiled by Bloomberg. U.S. bond yields are expected to climb as much as 1 percentage point by the end of 2016, with longer-term bond yields rising less rapidly, forecasts compiled by Bloomberg show.

Fed Chair Janet Yellen said last week that a rate increase this month was “a live option” because the U.S. economy is doing well. Employers added 211,000 jobs in November, more than forecast, the Labor Department reported on Dec. 4.

While other bond fund managers, such as Janus Capital Group Inc.’s Bill Gross, have urged the Fed to raise rates to reward savers and avoid asset bubbles, Gundlach has warned for months that the U.S. economy is still too fragile to withstand an increase.

He’s not the only one sounding alarms.

Meridee Moore, who is returning client money in her $1 billion hedge-fund firm Watershed Asset Management and converting it to a family office, cited the difficulty in finding good investments in distressed companies.

‘Grinding Declines’

“The last eighteen months have seen grinding declines in stressed and distressed credit and special situations equities,” she wrote in a letter to clients. “But even though market prices are lower, we have not been able to find new liquid credit investments with attractive returns and a margin of safety.”

Oaktree Capital Group LLC, the world’s biggest distressed-debt investor, has the most investment opportunities since Lehman Brothers Holdings Inc. collapsed, according to co-Chairman Howard Marks.

“Post Lehman there was too much to do, and now there is again,” Marks said Tuesday, referring to the financial crisis that followed the collapse of the investment bank in September 2008. “For the credit investor we have our first opportunities in several years. It’s been a long, long time."

Gundlach, who has said he doesn’t want his Total Return fund to become too big to maneuver, said he’s “open minded” about a soft close to new money in the fund next year.

“What we’re interested in is performing,” Gundlach said. “We feel very comfortable with our ability to manage” the fund.

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