TIPS for Losers No More as Gundlach Warms to Inflation Bondsby
DoubleLine chief says TIPS are becoming more attractive
Hasn’t bought them yet; sees prices moving lower short term
Jeffrey Gundlach hasn’t had many kind words for peers who piled into inflation-linked bonds in the years following the financial crisis, famously calling them investments “for losers” as recently as 2014.
But now the chief investment officer of DoubleLine Capital says the bonds, which rise in value with inflation, are becoming more attractive. While Gundlach hasn’t yet bought any Treasury Inflation-Protected Securities, predicting that their prices may fall in coming weeks, he says investors seeking to own longer-term government bonds may be better off with them.
“If an investor wants to own longer-term government bonds, I would recommend they own TIPS,” Gundlach, whose Los Angeles-based firm managed $102 billion as of June 30, said in an e-mail Thursday. “I would focus on TIPS of at least five years in maturity.”
Gundlach is warming up to the securities, which tripped up investors including Bill Gross in recent years, in anticipation that governments may start to use fiscal stimulus to boost economies that are still struggling after years of ultra-low or even negative interest rates. Such a pivot could drive up interest rates and inflation, so fixed-income investors should position themselves defensively, Gundlach said earlier this month.
TIPS have returned 6.3 percent so far this year, compared with a 4.7 percent gain for the broad Treasury market, according to data compiled by Bloomberg. Thursday’s $11 billion sale of 10-year TIPS saw strong demand, with a bid-to-cover ratio of 2.59, the highest since May 2014.
“TIPS look pretty good,” said Jonathan Beinner, global fixed-income CIO at Goldman Sachs Asset Management, in an interview Friday on Bloomberg Television. “Inflation is not yet at the target. But if you look at the TIPS market, what is embedded in that price, they are certainly less expensive than nominal bonds.”
Betting on TIPS has proven difficult in recent years as inflation remained subdued. In early 2013, Bill Gross, who was still running the Pimco Total Return Bond fund at that time, bought inflation-linked Treasuries in a bet that the three-decade bull market in bonds had ended and inflation would go up. While Treasuries subsequently fell as Gross had predicted, so did inflation expectations, amplifying rather than limiting losses for Gross. His fund fell 4.7 percent in May and June of that year, prompting what were record withdrawals at the time.
Gundlach stayed away from TIPS at the time, calling them a “disaster” and a “trap.” In a webcast in December of 2014, he said the securities were “for losers” for the time being. He scaled back his aversion in mid-2015, saying he no longer hated the bonds. But the real turning point, he said on Thursday, came on July 6, when he turned “maximum negative on the 10 year nominal” Treasury.
The yield on 10-year U.S. Treasuries bottomed that day at 1.32 percent, according to data compiled by Bloomberg. It has since risen to 1.62 percent, and Gundlach is predicting it may go to 2 percent before the year is over.
The bond market is sensing some inflation risks over the longer term, Gundlach said in his webcast Sept. 9. Rising costs for shelter and medical care are the most prominent areas of inflation, but bond prices are also falling because policy makers appear to be shifting toward more fiscal stimulus, he said.
“The bond market seems to be sniffing out that there’s some inflation risk over the longer term,” he said. “Not so much this year. Not so much next year. Maybe not for the next five years, though that might change.”
The consumer price index is expected to increase only 1.2 percent this year followed by gains of 2.2 percent in 2017 and 2018, according to data compiled by Bloomberg.