Gundlach Says More High-Yield Fund Woes Should Stay Fed's Hands

  • DoubleLine Capital chief: `There's never just one cockroach'
  • Says volatility should dissuade bankers from acting next week

More high-yield bond funds may fail following a redemption freeze at Third Avenue Management, a signal to the Federal Reserve to hold off on raising U.S. interest rates, according to Jeffrey Gundlach, chief investment officer of DoubleLine Capital.

“There’s never just one cockroach,” Gundlach said in a telephone interview Friday. “This volatility in the junk-bond market should easily stay the Fed’s hand, and unless this volatility calms down in the next three days, they’re going to have a hard time raising rates.”

Third Avenue said this week it was liquidating a $788 million credit mutual fund and delaying distribution of investor money so it can avoid unloading securities at fire-sale prices. The SPDR Barclays High Yield Bond ETF, a proxy for the junk-bond market, fell 2 percent Friday, it’s biggest one-day drop in four years, and closed at its lowest level since July 2009.

Policy makers meet Dec. 15 and 16 to consider the first increase the federal funds rate since June 2006. Traders place the probability of an increase at 74 percent, according to data compiled by Bloomberg.

More Selling

Gundlach, who has discussed weakness in the junk-bond market for months as a signal the Fed should delay a rate increase, said investors are likely to continue to sell risky debt as they close the books on 2015 and seek to avoid further losses.

“Maybe the markets will stabilize and the Fed will gain more confidence by Wednesday,” he said. “But my intuition tells me that if they’d met today, they would not have raised interest rates out of an appropriate abundance of caution.”

The fund manager reduced high-yield corporate debt at the $5 billion DoubleLine Core Fixed Income Fund to 2.6 percent of assets as of Nov. 30 from a peak of 8.1 percent in May, according to the Los Angeles-based firm. The fund has outperformed 86 percent of peers in 2015 and 98 percent over the past five years, according to data compiled by Bloomberg.