Gundlach

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...

In this brief interview with Morningstar, Doubleline's star MBS analyst, and the bane of TCW's existence, Jeff Gundlach, points out the glaringly obvious: i.e., that "if Citigroup was too big to fail, then so much greater is the risk for asset managers at a multiple of that market cap." Obviously the mortgage expert here is contemplating asset manager behemoths such as PIMCO and BlackRock, which have quietly become even more institutionalized within the fabric of the financial markets, than some of the TBTF banks. And without access to the Fed's discount window, liquidity threats to firms like PIMCO are exponentially greater than even for a bankrupt POS like Citigroup. No wonder Gross was offloading European sovereign debt with gusto as of last check. With total assets of over $1 trillion, saying that a failure by PIMCO, and by extension its Fed-unmoderatable counterparty risk, would have huge implications on the US financial system, is so obvious, that it is completely understandable that there is not one single provision in the Senator from Countrywide and the Congressman from Fannie's FinReg proposals on how to tackle this most recent threat to capital markets.

Update: The LA Times adds that according to the suit, on the day TCW fired him, the firm found “inappropriate contraband” in his offices, “consisting of marijuana, drug paraphernalia . . . and a collection of 12 sexual devices, 34 hardcore pornographic magazines and 36 hardcore sexually explicit DVDs and videocassettes.”

Dear Valued Clients,

I am writing to inform you that today TCW filed a lawsuit against certain former members of its previous fixed income portfolio management team, as well as their new company, DoubleLine Capital Group LLC.

The charges in the complaint are serious, disturbing and specific, and confirm TCW's reasons for relieving Jeffrey Gundlach, and his colleagues Cris Santa Ana, Barbara VanEvery and Jeffrey Mayberry of their duties. There is no reason to recount these charges here, but they clearly support TCW's conclusion that members of TCW's previous fixed income portfolio management team engaged in a pattern of breaches of fiduciary duty and other unlawful activity, which threatened TCW¹s business and reputation. Specifically, and among other things, TCW learned that persons close to Mr. Gundlach, now involved with DoubleLine, systematically downloaded very large volumes of TCW proprietary information over a period of weeks before Mr.Gundlach's termination.

One of the cushiest and least risky assignments over the past year for the big bond funds has been their agency assignments on various Treasury-mandated security purchasing programs to bail out the market: these have been the definition of free money. The PPIP program has been a good case in point, which in recent months has been somewhat dormant ever since the administration realized it could generate a much greater IRR by purchasing index futures than toying around with AAA-rated CMBS, in which bond fund TCW was a key partner of the Treasury. Yet in a striking example of rational thought, the government has demonstrated it knows what "key man" provisions are. And after TCW fired Gundlach for having "too lofty" an aspiration, the Treasury has decided to fire TCW as a PPIP manager for the Treasury in turn. Poetic justice.

The big guns in LA are out swinging, with news emerging that Jeff Gundlach will get funding and a minority investment from of bond giant and other major TCW defector, Oaktree. Howard Marks' firm is now set to eat TCW's municipal lunch. And all the disciples of Robert Day had to do was promote the guy. Also, futures in the "Battle of the Attanasios"(Paul and Mark) just surged majorly in favor of the House creator.

"Over the weekend, key MetWest professionals assumed portfolio management responsibilities for all of TCW’s high-grade fixed income client accounts. This transition has been orderly and seamless, a testament to the professionalism and enthusiasm of both MetWest and TCW employees.

Attached please find a complete list of our high-grade fixed income products and the respective portfolio managers, effective today. We expect you will notice a more collaborative, team-based approach to portfolio management. We believe this culture of cooperation will facilitate a quick, effective integration of our fixed income teams into a single unit.

We anticipated possible resignations as a result of this announcement. However, as of today, we have retained 70% of our mortgage-backed securities team." - TCW

"TCW separately announced that Jeffrey E. Gundlach has been relieved of his duties as TCW's Chief Investment Officer and lead portfolio manager of TCW's high-grade fixed income funds and accounts and removed from the Board of Directors of TCW Group, Inc. The firm deeply regrets the need to take this action. Mr. Gundlach threatened to take certain actions that could have jeopardized the firm's ability to manage clients' fixed income assets. The firm had no alternative but to take the necessary steps to ensure the continuity and stability of its high-grade fixed income business and the highest standard of attention to client's interests." - TCW

Zero Hedge has come across what could well be Jeff Gundlach's swan song as TCW. While we are still investigating the curious circumstances surrounding Gundlach's unceremonious firing, and subsequent departure of his closest lieutenants, we leave readers with this last masterpiece from the mortgage bond expert while still a TCW employee.

Straight from the CIO of TCW

Gundlach June 15 -

hat tip Stephen