Jeff Gundlach Begins Selling Treasuries
Former TCW Total Return Bond Fund maven Jeff Gundlach, who since December has been running his own money at OakStreet-blessed DoubleLine, has just moved from "overweight" to "small underweight" on Treasurys. The gradual shift out of USTs is in line with the bond manager's forecast made in June when the 10 Year was 3.1% that yields would drop another 60 bps to 2.5%. Yet the main catalyst for the selling is driven by the inability of the 10 Year to make a new record low, unlike both the 2 and 5 Years, both of which are trading at historical tights, no doubt facilitated by the Fed's gradual encroachment of ever to the right of the entire yield curve. As Bloomberg reports: "this “divergence in behavior across the yield curve is very significant,” said Gundlach, who oversees $4.8 billion in assets in Los Angeles as chief executive officer of DoubleLine. “So while the fundamentals for low rates remain compelling, the message of the market action suggests that much of these now widely recognized fundamentals are reflected in Treasury bond prices." We are confident that given enough time, and enough fiat linen printed, the entire curve will eventually be one flat line as the Fed (and Pimco) are now the marginal buyers of any resort in their attempt to make homeownership with zero money down, an interest-free endeavor. After all, you can't have growth unless the animal spirits are rekindled, and this kind of direct intervention is the only thing the Keynesian acolytes at the Marriner Eccles building know how to do well. So where is Gundlach investing next:"We moved the proceeds from the Treasury sales into a mix of corporate bonds, including our first allocation to below investment grade corporate bonds." Of course, with even traditional MBS and UST investors now actively gobbling up HY, we are very concerned that when the inevitable flush in the B2/B space occurs, and it always eventually does, there will be no marginal buyers of anything less than IG. But with a market as broken, technically driven and centrally planned as ours, who even pretends to think about what tomorrow may bring...
More from Bloomberg:
Yields on 10-year notes were 3.12 percent when Gundlach made his prediction on June 23 during a speech at a Morningstar Inc. conference in Chicago. The yield touched a 19-month low of 2.4158 percent on Aug. 25. Ten-year note yields, which fell 5 basis points today to 2.48 percent, reached a record low of 2.04 percent on Dec. 18, 2008.
The notes’ prices tumbled the most since June 2009 on Aug. 27 after Federal Reserve Chairman Ben S. Bernanke said the central bank will provide additional stimulus as needed during opening remarks to central banks at a symposium in Jackson Hole, Wyoming. The two-year note yield touched a record low of 0.4542 percent on Aug. 24.
“This is a long-term bottoming process, which could very well take several weeks or even a few months more to play out,” Gundlach said in an interview. “We moved the proceeds from the Treasury sales into a mix of corporate bonds, including our first allocation to below investment grade corporate bonds since the launch of the Core Fixed Income Fund on June 1,” which invests in different sectors of the global fixed income markets. The fund is up 5 percent since its inception through Aug. 27, he said.
The five-year Treasury note yield touched a 20-month low on Aug. 25 of 1.2775 percent, just 9 basis points shy of its record low of 1.1852 percent, reached on Dec. 17, 2008.
An “underweight” position in Treasuries means that a firm owns a smaller percentage of the securities in its portfolios as is contained in benchmark indexes used to measure performance. “Overweight” means the firm owns a greater percentage.
In the meantime, we are confident that the other major bond powerhouse, Pimco, will be more than happy to bid up everything that Gundlach wishes to part ways with. The former, which is now effectively the Fed lite, has no other choice, than to frontrung and mimic the Fed in every single action, as with over $1.2 trillion in assets, there are just no players of sufficient size left that it can transact with. To say that this will all end in guaranteed tears is an understatement.