- DoubleLine manager says corporate bonds are richly valued
- Increase in defaults would put the securities at higher risk
Jeffrey Gundlach, chief investment officer of DoubleLine Capital, said mortgage-backed securities are trading cheap relative to corporate bonds and a better bet because of the elevated risk of defaults in high-yield debt.
“This would be a good time to be selling corporate bonds and buying mortgage-related bonds,” Gundlach told investors during a webcast Tuesday.
Mortgage-bond funds have lagged behind other sectors of the debt market this year. Gundlach’s $58 billion DoubleLine Total Return Bond Fund, which had more than 80 percent of its assets in mortgage-related securities as of Feb. 29, has returned about 2 percent in 2016, compared with a 3.4 percent gain by the Barclays U.S. Aggregate Bond Index, the main benchmark for the broader bond market.
In February, less than a week before shares of the SPDR Barclays High Yield Bond ETF, an exchange-traded fund tracking junk bonds, hit their 2016 low, Gundlach said corporate debt was a looming opportunity as prices continued to fall. The index fund closed Tuesday at $34.42, up 9.3 percent from its Feb. 11 nadir.
Defaults in high-yield debt, especially loans to energy-related companies, are likely to rise, putting corporate debt as a category at higher risk, Gundlach said on Tuesday’s webcast. Junk has rallied with Treasury bonds because Federal Reserve Chair Janet Yellen seems less inclined to raise interest rates, he said.
“The junk market was scared to death that the Fed was actually going to go forward with their suicide mission to raise rates four times this year, four times next year and four times the year after,” Gundlach said. “It’s not surprising that the same burst of enthusiasm for Treasury bonds, once the Fed seemed to abort their suicide mission, it also helped junk bonds. I don’t think that can continue any longer.”
Government-backed Ginnie Mae mortgage-related securities “are cheap relative to Treasuries,” the fund manager said. “That’s been a good buy point for the past six years.”
Gundlach’s presentation focused on two of his funds, which aren’t invested as heavily as the Total Return Fund in mortgages:
* The $6.2 billion DoubleLine Core Fixed Income Fund, an intermediate-term bond fund that returned 3.1 percent in 2016 through April 11 and outperformed 96 percent of its Bloomberg peers during the last five years.
* The $225 million DoubleLine Flexible Income Fund, an unconstrained bond fund that has risen less than 1 percent this year, outperforming about two-thirds of its Bloomberg peers this year. The fund started in April 2014.