Sees relative yields widening in due time; 'something looks broken' in corporate debt market
Jeffrey Gundlach's DoubleLine Capital LP is favoring cash over almost all investments including corporate bonds, wagering that relative yields will widen even after expanding to the most since October 2009.
“I want fear,” Gundlach, the founder and head of Los Angeles-based DoubleLine, said in an Aug. 24 telephone interview. “I want to buy things when people are afraid of it, not when they think that it's a gift being handed to them,” he said of speculative-grade bonds.
Some of DoubleLine's funds, which usually don't hold any cash, currently are allocating 15 percent, said Gundlach, who managed the top-rated intermediate-term U.S. bond mutual fund for 15 years. DoubleLine's Multi-Asset Growth fund, which can invest across asset classes and market sectors, holds 30 percent in cash, he said.
DoubleLine has attracted about $14 billion since its December 2009 inception. Gundlach previously co-managed the TCW Total Return Bond Fund (TGLMX) with Philip Barach. Gains averaged 7.5 percent annually in the five years ended Dec. 4, 2009, which compares with 7 percent for the Total Return Fund run by Bill Gross of Newport Beach, California-based Pacific Investment Management Co., the world's largest bond fund. Barach is also at DoubleLine.
The firm, which has grown from $3.1 billion in June 2010, increased cash holdings as a rally in U.S. Treasuries pushed down yields, Gundlach said.
Spreads Widen
U.S. investment grade corporate bonds are paying 3.78 percent down from 4.16 percent in April, according to Bank of America Merrill Lynch's U.S. Corporate Master Index. The debt has lost 0.3 percent in August, paring 2011 gains to 5.3 percent, according to Bank of America Merrill Lynch index data.
The extra premium investors demand to hold the debt instead of U.S. Treasuries expanded to 227 basis points on Aug. 24, the most since October 2009, the index data show. Relative yields rose 59 basis points this month to 225 basis points through yesterday. Spreads peaked at 656 basis points in December 2008 after Lehman Brothers Holdings Inc. failed and credit markets seized up.
Waning confidence in the economy and Europe's worsening sovereign debt crisis have sent investors fleeing from risky assets and made it harder for companies to access capital markets. Sales of corporate debt in the U.S. have dropped to $46.6 billion this month, compared with $98.4 billion in the same period last year, according to data compiled by Bloomberg.
This week, there were no offerings of junk bonds, ranked below Baa3 by Moody's Investors Service and less than BBB- by Standard & Poor's. That's left sales in August at $1 billion, compared with the monthly average this year of $28.5 billion, Bloomberg data show.
‘Something Looks Broken'
“Something funny is going on in the world of corporate bonds now -- something looks broken,” he said. “It seems there's less willingness all of a sudden to be lending money to corporations, maybe because the absolute yields are so low. You're starting to see that saturation point.”
Junk bonds have plunged 5 percent this month paring gains for the year to 0.9 percent, Bank of America Merrill Lynch index data show. Spreads on speculative-grade company notes, rated below Baa3 by Moody's Investors Service and lower than BBB- by Standard & Poor's, have widened 185 basis points this month to 743 basis points.
--Bloomberg News--
