Josh Brown has posted a monster summary from some recent comments Jeff Gundlach made in NYC this week. I highly recommend reading the whole piece as he provides some really valuable investment insights. I am posting a brief snippet of some of his fixed income ideas here:
On Government Bonds: The big winner this year in asset classes is Government Bonds, up 9% year-to-date.
On Duration: Basically he says ‘No, thank you.” to anything with a yield under 1% – “this glass of water is more worthwhile than a government bond under 5-year duration”. DoubleLine had been loading up on long-dated Treasurys since March in anticipation of the end of QE2. The trade is working right now obviously. Markets don’t wait for some publicly known date and then adjust to something, they anticipate and game it in advance, which is what the end of QE2 trade was about. People looking at the 30-year bond lamenting the low yield forget that it is the price action that made the trade work – the long bond’s price can move 20%. Says the 30-year has not yet “punched through” to the yield lows of 2008 although the 5 and 10-year bonds have. It definitely could but is short-term overbought.
On Corporate Bonds: Investment grade corporates have done extremely well but the below investment grade (junk) market “has absolutely fallen apart”. Junk bonds will really hit the wall and face serious wave of defaults beginning in 2012 as all the refinancings of 2009 and 2010 vintage come due. Many of these companies have improved cash flow by lowering their interest expense with refis but they haven’t reduced their indebtedness overall. That said, pension funds are still underfunded and will be forced to use investment grade corporates to make their assumptions, this will keep a “technical bid” beneath that market.
On Muni Bonds: “They’ve done well but can this market really stand up to a wealth tax” imposed on the income?
On Money Market Funds: Why would anyone own a non-government money market fund? “This is what we call ‘Reward-Free Risk’.”
On Mortgage Bonds and the Big Trade: This is where Jeffrey began his career and what he knows best. ratings agencies don’t understand how to rate securitized mortgage pools and he takes advantage of what the the repayment risk that they misperceive as credit risk. He is pairing mispriced GNMA bonds with long-dated treasurys to put together a risk-offsetting bond position that offers both interest rate-risk protection and a higher yield than the other total return bond funds. There is no repayment of capital or leverage involved in getting a higher yield, just a better constructed trade than the next guy.
On Emerging Markets Fixed Income: “A secular improving credit story”. G7 countries have 4 times the debt-to-GDP ratio of EM nations. He is blown away that EM Debt trades at “twice the yield of developed country debt and triple the fundamentals”
Check out the whole piece at Josh’s site.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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