THE BOND MARKET OUTLOOK

Sorry to double up on you with videos here, but Jeff Gundlach, Founder of DoubleLine Capital was on CNBC earlier today and provided an excellent overview of the bond market.  In summary he says:

  • High yield corporates are VERY expensive.
  • Investment grade corporates are relatively attractive.
  • Municipal bonds are unattractive due to the potential for future turmoil.
  • US Treasuries are more attractive than all three of the above on a relative basis.
  • Government backed mortgage debt remains attractive.

I might add that I agree with Gundlach’s sentiments regarding the muni market.  Despite the fact the fact that I do not see major crisis ensuing in the muni market the clouds that are currently circling overhead do make this a market where the potential risks could outweigh the rewards.  Investments should be selective and taken on a case by case basis.  For instance, California munis obviously require a great deal more due diligence than Texas munis.  As Gundlach says, there are simply better options in the current environment if you can’t justify the risk/reward of even owning munis.  Of course, if you want someone with superior expertise to handle the bond portion of your portfolio you can’t really go wrong with Gundlach’s fund.  His broad market outlook can be found here if you missed it earlier this month.

Source: CNBC

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Why not let the bad munis go! It sends the right message to all markets. Don’t call it default “restructuring” sounds much more appropriate. It is one good way that makes the wealthy pay for this mess and not the middle class. I’m sure that idea will get thrown out immediately, but if not munis than what?

  2. Here’s a recent interview with Gundlach.

    http://advisorperspectives.com/newsletters11/3-gundlach2.php

    Disappointment No. 2 was the “lies” that Fed Chairman Ben Bernanke told on a 60 Minutes interview. Gundlach said Bernanke appeared scared – “he was twitching” – when he looked right in the camera and said “we are not printing money.” Bernanke, according to Gundlach, was relying on a semantic argument: we are not printing money, but rather creating it electronically. That was an “awfully cowardly thing to hide behind,” Gundlach said, since we are unquestionably monetizing our debt.

  3. So capitalism without losers is fine at state level but not at municipal. Interesting god like decision lol.

    You may be allowed to die. You may not. So it was said,

  4. Go back to bernankes green shoot interview with 60 minutes. In it he is asked if he is printing money, he said yes. A year and a half later he says no.

    I know implicitly the answer is no because its just reserves but laughable how he did a 180 due to political pressure. Liar.

  5. Should the federal govt file BK if a bunch of politicians don’t raise the debt limit? No. It’s just flat out stupid. There is no public purpose served in allowing states to fail. Can you really justify such a thing? Do you even understand the kind of havoc that would cause? And for what? So a bunch of people can say: “lesson learned!”

    There’s an enormous difference between allowing a huge portion of the govt to fail (by sheer choice) and allowing pvt institutions to fail. Not differentiating between the two is absurd. I am 100% in favor of pvt institutions failing. But a state or federal govt should never be allowed to fail in a monetary system such as ours. These states are making their painful cuts. You’re getting your pound of flesh. Be happy. You’ll be rewarded with higher taxes instead of defaults. :-) Either way you’ll still be unhappy with the results, but I am quite certain that defaults would cause far more pain than some austerity.

    I hate waste as much as the next guy, but there’s ways to get around these problems that doesn’t involve LEH X 100….

  6. Actually, nottpc, makes the point here, I think, TPC. Texas was, until recently, held up as the poster child of sane state spending. So, we all searched for munis in TX. Now, not so much. Can we trust any state or municipality at this point? Trusting a particular subset of munis means trusting the rating agencies (again). Do you want to put your money on that?

    I agree with the larger issue. Munis will be okay again eventually, but there are still headwinds until they are so oversold that rewards substantially outrun market risk.

  7. I am not advocating that people run out and buy munis. I am simply saying that there is not going to be a panic in the muni market that can then compare us to Europe. We have had a record decline in state tax revenues. Of course there are shortfalls. The situation won’t rectify until the economy improves substantially. There is no reason to cause a panic about this. I think it’s getting blown way out of proportion. No state will default. It would be sheer insanity.

  8. There are ways to default and then there are other ways to disappoint investors. Outright default is rare. But states could pay principal without interest, or reduced or delayed interest. Or states could wait until Uncle Sam makes the “polite default” that Gundlach has previously mentioned: simple inflation.

    But I am being merely academic, TPC. I agree with you fundamentally. States will not default in any conventional way, and at some point munis will be an excellent buy.

  9. Although it is only reserves, they are still printed and spendable as money. So he is printing money.

    If this increases the money in circulation in the economy or not is a different question. What is sure is that money has been printed.