Acceleration in 10-year yields could force high yield corporate debt into a ‘black hole of illiquidity’, according to DoubleLine Capital founder Jeffrey Gundlach.
Gundlach, who runs the $54.1 billion DoubleLine Total Return Bond fund, made the comments in response to a question about the end of the bond bull market.
When asked what the combination of aggressive spending by US President Donald Trump and rising rates from the Federal Reserve would entail, the Citywire + rated manager said: ‘As rates rise this year, we should take a look at 3% on the 10-year US treasury in 2017. If yields accelerate to the upside above 3%, it is truly the end of the bull bond market, but not just for bonds. Times are a-changing and most markets would be impacted.'
‘If the 10‐year accelerates above 3%, junk bonds will fall into a black hole of illiquidity. While stocks are trading at a very high level relative to earnings. The cyclically adjusted price-to-earnings ratio is nearing 1929 levels. Expect earnings to expand this year and P/Es to fall.
In this scenario Gundlach recommended cutting back on US stocks and diversifying globally, which would mean adding stock allocations in emerging markets, India, and Japan.
Elsewhere, Gundlach is increasingly bullish on commodities and said the market was moving to the end of a multi-year bottom.
‘I recommend adding commodities or real assets to a portfolio. I expect oil to move sideways this year and stay in a range between 40s and higher 50s. Inventories are still high,’ he said.
‘Gold appears to have bottomed as well in 2015. I like a permanent position in gold. It is rising again, but I am not enthusiastic about it. However, I would stick with my positioning as a diversifier. Copper being down since December is supportive of the bond market rally. If it starts outperforming gold the economy is revving up.’
Gundlach has adopted a decidedly bearish stance on bonds since the start of the year. He also became embroiled in a war of words with rival Bill Gross over what would technically define the end of a bull market for bonds.
Speaking after Gross had said bond yields hitting 2.6% would symbolize a move to a bear market, Gundlach said ‘second tier’ managers were wrong about this indicator and first stated his view that bond yields would rise above 3% in 2017.