Bond guru Jeff Gundlach was on CNBC Wednesday and had some interesting things to say. Here’s what you need to know:
To see a list of high yielding CDs go here.
1. Investors are jumping out of the frying pan and into the fire.
Investors have been exiting bonds and bond funds based on the premise that rates cannot go much lower. Basically that the bond market is currently balanced precariously on the Fed’s zero rate interest rate policy which may be winding down. In their search for yield that have put the money that they are moving out of bonds into things like dividend paying stocks, mortgage REIT’ss, Master Limited Partnerships (MLP’s). This is a fundamental mistake because these assets do even worse than bonds in a rising rate environment. We have seen this over the last 2 months as rates have moved higher. While bonds have been flat to modestly negative over this period the performance of dividend paying stocks, Mortgage REITS and MLP’s has been horrendous.
2. The only place you are going to make money over the next few weeks and perhaps months is in the “most hated asset class” which is long term US government bonds.
While Gundlach does think that we have seen the low in Treasury rates last year at 1.38% he does not think that the 10 year yield is going to hit 2.50% in 2013. One of the reasons that he thinks this is that there is no sign of inflation anywhere. This is especially true in the commodities market where commodities like gold and copper keep making new lows. On Wednesday when the interview was done the 10 year was right around 2.30%. Today we are above 2.40% so Gundlach’s thesis may get tested sooner rather than later.
3. The first week of August could be huge for the bond market.
Investors in bond index funds like Vanguard’s Total Market Bond Fund are likely to get their first statement in a long, long time that shows negative 1 year returns. Gundlach says that many bond fund investors incorrectly think that the 1 year return on their statement is the fund’s forward looking yield. This could trigger a mass exodus from bond funds. While he did not say this, this would likely be a great buying opportunity for the savvy investor.
You can watch the full interview below:
Learn how to generate more income from your portfolio.
Get our free guide to income investing here.