Three of the country’s most prominent bond portfolio managers have warned investors that almost-record low volatility is not set to last and to raise cash today to put to work after a near-term market correction.
Citywire + rated Jeffrey Gundlach, chief executive and chief investment officer of DoubleLine Capital, warned in a webcast on Tuesday that ‘the days of low volatility are probably numbered.’
Gundlach noted that the US stock market has climbed to record highs while the volatility index has been plummeting to a historically low level.
The CBOE Volatility Index (VIX), Wall Street’s gauge of fear in the market, dropped Friday to 9.37, its lowest level since December 27, 1993. The VIX opened at 10.48 on Wednesday.
Gundlach, who manages the $53.9 billion DoubleLine Total Return Bond fund, said low volatility was almost necessarily followed by high volatility, which should be a cause for concern given current market conditions.
He also believes that a weaker period is ahead for the bond market and the equity market.
‘If you're a trader or a speculator I think you should be raising cash today, literally today. If you're an investor you can easily sit through a seasonally weak period,’ said Gundlach.
In a recent interview with Citywire he cautioned investors against being complacent about current low volatility.
‘You see that [complacency] exhibited through very low equity volatility, very low interest rate volatility, a very tight credit spread. To us all those things are linked together but we simply don’t believe that it’s going to stay this low,’ he said.
‘So one of the things we are doing in the portfolio is moving up our credit quality and anticipating that we will get some volatility and better buying opportunities to add to risk exposures.’
His views echoed those of Pimco’s recently published annual Secular Outlook paper, in which authors Dan Ivascyn, Richard Clarida and Andrew Balls advised investors to take profits and use the cash to buy after markets correct.
‘We believe that many market participants today are too relaxed, that medium-term risks are building and that investors should consider using cyclical rallies to build cash to deploy when markets eventually correct, and possibly overshoot, as risks are repriced,’ they wrote.
Meanwhile, Bill Gross of Janus Henderson, also warned on Tuesday that investors should work on reducing their risk appetite because of the sustained US bull market could be easily stunted by ‘secular headwinds whose effects are difficult to observe in the short run.’
Gross, who runs the $2.1 billion Janus Henderson Global Unconstrained Bond fund, said in his June investment outlook that today’s economy induced risks that were not present before because savers and investors increasingly were steered toward making money in the financial economy, which Gross coined ‘making money with money.’
‘Ultimately investors must recognize this risk along with increasingly poorly hedged liabilities and low growth resulting from ‘new normal’ secular headwinds in developed economies,’ said Gross.
‘But don’t be mesmerized by the blue skies created by central bank quantitative easing and near perpetually low interest rates. All markets are increasingly at risk.’
Gross previously said at the Bloomberg Invest New York summit that US markets were at their highest risk levels since the 2008 financial crisis.