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DoubleLine founder and bond market maven, Jeffrey Gundlach has warned investors that if rates continue to fall a “melt up” in the bond market could be in the offing.
“If we go down [more] on Treasury yields, we will see one of the biggest short-covering scrambles of all time,” Gundlach told delegates at the Altegris Investments strategic investment conference in San Diego on Wednesday, which was attended by Dan Jamieson from Financial Magazine.
To see a list of high yielding CDs go here.
Gundlach went on to say: “Speculation in the market on shorting Treasuries was very high, If for some reason someone has to cover these shorts, you could actually see the low yields of 2012 get taken out.”
“I’m not predicting that,” Gundlach quickly added. “I think it’s a 30 percent chance only, but I used to think it was a 10 percent chance.”
But the moment of reckoning is fast approaching. Gundlach said the 10-year Treasury note has a “massive resistance point at 2.47%, and all year like a broken record I’ve said it’s going to 2.47. If 2.47 gets broken, I think the melt-up starts. We’re getting close to the moment of truth.”
On Thursday, the 10-year Treasury yield fell 2.5 basis points to 2.495%.
So where is the best place to find value in the bond market these days? “Based on historical ranges of relative yields, mortgage-backed bonds look “reasonably attractive” compared to Treasuries, Gundlach said, while municipal bonds and emerging-markets bonds are overvalued, and investment grade corporates appear “massively overvalued.”
And don’t even think about high yield, Gundlach warned. It is even more expensive and junk paper carries more risk than most think.
“People love junk bonds because for some weird reason they feel [junk bonds] don’t have interest rate risk,” Gundlach said. Last year, high-yield paper held up as rates rose, but there’s no longer a large enough yield cushion to protect junk investors from higher rates.
“That can’t happen again, not at these interest rate differentials,” he said.
“The cheapest bond now is the long-term U.S. Treasury, believe it or not,” Gundlach added. “No wonder there has been this move down in Treasury yields of some significance.”
Todays Other Top Stories
Reuters: – Puerto Rico junk bonds dominate U.S. municipal trades. – Trading of the $3.5 billion bonds Puerto Rico issued in the middle of March, the largest U.S. municipal junk bond sale in history, has been fast and furious.
APP Online: – Detroit bankruptcy masks attractive investment in municipal bonds. – Detroit municipal bonds make up a fraction of the overall muni market, and Nuveen Investments’ John Miller tells TheStreet’s Joe Deaux market participants haven’t realized the potential in munis.
Comcast: – Taxes on municipal bonds. – Higher taxes on municipal bonds present a difficult dilemma for local governments. How can local and federal governments work together to compromise? Robert Traynham and Chris Rogers, President of the National Association of Counties discuss the issue.
Moody’s: – Moody’s downgrades Jackson Municipal Airport Authority’s (MS) revenue bonds to Baa1. – Moody’s Investors Service has downgraded Jackson Municipal Airport Authority’s (MS) Airport Revenue Bonds to Baa1, affecting approximately $39.4 million of outstanding rated debt. The outlook remains stable.
Bloomberg: – Puerto Rico pads Franklin stock funds on yield lure. – Franklin Resources Inc. (BEN), Goldman Sachs Group Inc. (GS) and Invesco Advisers Inc. are directing Puerto Rico bonds to their mutual funds that typically buy equities, corporate debt or emerging-market securities.
Bloomberg: – Illinois pension fix halted while unions pursue challenge. – Illinois government workers won a temporary halt to a 2013 law passed to fix the state’s $100 billion pension shortfall while they fight it in court.
Bloomberg: – The muni rally is getting to be so strong, funds don’t want your money anymore. – John Flahive, director of fixed income at BNY Mellon Wealth Management, said he’s considering closing the company’s Municipal Opportunities Fund (MOTIX) to new investors as tax-free yields fall to 11-month lows.
LearnBonds: – Portfolio diversification. – Portfolio diversification is a risk management technique by which investors minimize their portfolio risk by combining a variety of assets. Diversification tries to smooth out unsystematic risk events in a portfolio, and moderate the short-term effects of individual investments, so that the positive performance of some assets will neutralize the negative performance of others.
FT: – Russia dumps a fifth of its U.S. Treasuries. – Russia has offloaded a fifth of its holdings of US Treasury debt in March at a time of heightened speculation that its assets would be frozen as part of sanctions over the crisis in Ukraine.
MarketWatch: – Treasury-bond market shows signs of fear, panic buying. – The behavior of long-duration Treasuries so far in 2014 has been nothing short of incredible. The rallying cry entering the year was that the bond rally was over. Rising rates were coming thanks to Fed tapering, and a strengthening economy. Yet, to normalize rates, growth and inflation must normalize.
High Yield Bonds
IFR: – U.S. high-yield market takes breather. – The US high-yield primary market took a breather on Wednesday, with no new trades pricing despite a strong rally in Treasuries that took yields on the 10-year to their lowest since October.
BCA Blog: – U.S. High-yield: Maximum overweight. – Our model predicts that the default rate for speculative grade bonds will average near 3.0% during the next year. Moody’s latest estimate for the 12-month trailing default rate is much lower at 1.7%. Our view is that the U.S. and global economies will continue to expand (and recession will be avoided) over at least a one-year investment horizon. In this case, default losses could remain less than that projected by our model which is calibrated to pre-crisis macro factors.
ETF Daily News: – Why now may be the right time for emerging market bonds. – After several months of not hearing much about emerging market (EM) bonds (other than “Where’s the exit?”), we have recently been fielding questions on whether there is value in this space. A key focus is the relative value of USD denominated EM debt relative to other fixed income sectors, which I discussed in a Blog post last quarter.
FT Adviser: – Neuberger Berman launches ‘alpha-driven’ EM fund. – The Neuberger Berman Emerging Market Debt Blend fund has been advertised as a more “dynamic and alpha-driven” solution to traditional fund-of-fund approaches and will invest in both hard and local currency emerging bonds.
IPE: – Institutional investors inflating catastrophe bond prices, expert says. – Catastrophe bonds’ attractiveness is waning, as pension funds from the Netherlands, Nordic region and UK have piled into the market over the last 6-12 months, compressing yields, according to Urs Ramseier, chairman at Swiss boutique Twelve Capital.
Investment News: – Where to access retirement income now. – Take it from the pros: annuities, individual municipal bonds and equities in the pharmaceutical sector hold good prospects for clients seeking retirement income.
Business Insider: – The whole bond market is expensive. – Broad bond market strength in 2014 has left fixed income investors with slim pickings for investment opportunities. Low Treasury yields are not the only dilemma facing bond investors. The 2014 rally in corporate bond sectors, emerging market debt, high-yield bonds, and even municipal bonds has been impressive and has led to more expensive valuations.
TheStreet: – Bonds are outperforming stocks this year. – Many Wall Street analysts and money managers made the wrong call so far this year by saying to avoid Treasuries. But analysts and investors have forgotten that the stated purpose of the Federal Reserve’s policy is to keep long-term yields low to spur bank lending.
Businessweek: – Stubborn bond bears double down on money-losing wager. – Bears are sticking to their call that bond prices are going to collapse even as recent evidence points to the opposite: long-dated U.S. Treasuries have gained 11.9 percent this year, outperforming stocks and junk bonds. The short trade remains popular with individuals and professional speculators determined they will profit as the Federal Reserve pulls back on monetary stimulus.
Market Realist: – Must-know variants in developed market international bond funds. – International bond funds like the Vanguard Total International Bond Index ETF (BNDX) can have various investment styles determined by their stated choice of bond investments. Heres a brief overview of the different types of international bond funds available.
Bloomberg: – S&P 500 drops amid small-cap selloff while bonds rally. – U.S. stock indexes slumped from all-time highs as a selloff in small-cap and Internet companies resumed. Treasuries rose with emerging-market shares on speculation central banks will push ahead with stimulus efforts.
Gross: 10-yr Treasury beginning to reflect PIMCO’s “New Neutral” of 0% real FF in 2017. #PIMCOsecular
— PIMCO (@PIMCO) May 15, 2014
US 30-year yields have fallen to 3.33 per cent, their lowest since June 2013
— Chris Adams (@chrisadamsmkts) May 15, 2014
Bull flattening in the bond markets really weighing in on bank stocks
— David Schawel (@DavidSchawel) May 15, 2014