August 6, 2014 9:35 am

Gundlach reveals 2020 vision for bond market

It is not only hindsight that is 20/20. While other bond fund managers are explaining why they failed to see this year’s fall in interest rates, Jeffrey Gundlach, who did, is talking not about the past but about the future, and his next piece of foresight is focused onbelieve it or not 2020.

“A lot of things seem to be pointing to the year 2020 as an interesting timeframe,” he says, sipping cool lemonade in the Los Angeles heat. Mr Gundlach is the founder of DoubleLine, which went from a standing start in 2009 to $50bn in assets to become the fastest start-up ever in the fund management industry.

When a bond market maven says “interesting”, be scared. What is good for fixed income is rarely good for the economy as a whole, and Mr Gundlach has a whole list of interesting: a wall of high-yield debt that companies will need to refinance; soaring federal government deficits as baby-boomers drain social security and healthcare funds; ageing populations in China and other emerging markets; and the Federal Reserve’s Treasury holdings maturing, too.

His conclusion? By 2020, the Fed may well be resurrecting quantitative easing, its palliative for troubled markets.

“It seems like one of the consequences of this zero interest rate policy is you’ve pushed out the problem of refinancing, of rolling over, but you’ve really compounded the magnitude of it and it seems to be focused around the 2020s.”

Mr Gundlach has agreed to squeeze an interview in before a trip to New York state, where he is circling the auction of his hometown American football team, the Buffalo Bills, hoping to become a minority investor and ensure it stays in the down-at-heel city on the US side of Niagara Falls.

Quantitative easing has been kind to Jeffrey Gundlach the art collectorMondrian and Jasper Johns are among the personal holdings stolen and then returned after an art theft in 2012 – but it may not be so much for Jeffrey Gundlach the putative sports team owner. These are precisely the luxury assets, along with London and New York real estate and classic Ferraris, that have soared in value as money has been pumped into the system, he says.

Mr Gundlach’s star status, his supreme self-confidence and a strong track record stretching back to his earlier career inside TCW, made him an obvious heir to the “bond king”, Bill Gross, even before the Pimco founder hit a period of poor returns and negative headlines this year.
DoubleLine’s assets under management pale next to the $1.9tn at Pimco, and Mr Gundlach’s Total Return Fund and his smaller but more comparable DoubleLine Core Fixed Income fund add up to $36bn versus the $223bn in Mr Gross’s flagship fund. But where Pimco called the bond market all wrong at the start of the year, when the overwhelming consensus was for 10-year Treasury yields to march upwards from 3 per cent, Mr Gundlach reckoned on weak economic growth and weak housing and a slide in yields. Today, they are below 2.5 per cent.

If you GoogleInterest rates will fall in 2014what pops up is a whole bunch of articles that say bond prices will fall in 2014 because yields will rise. It picks up the search in a convoluted way

There’s only a couple that actually specifically answer that request and one of them is ‘Gundlach says interest rates will fall in the first half of 2014’. But I thought it was one of the easiest calls.”

Even after a 4 per cent print for second-quarter GDP (inflated, he says, by inventory stocking), he believes forecasters and equity market investors will eventually be disabused of the idea that the US economy is reachingescape velocity”.

They cling to the idea now, he says, “and then all of a sudden they won’t. It’s kind of like punching a pumpkin. It’s the same thing, the same thing, the same thing and then all of a sudden it all caves in. I would still be surprised to see full-year 2014 GDP exceed 2 per cent.”

That does not mean that DoubleLine is not positioning itself to capitalise on economic growth of sorts, at least in the area of mortgages, where the US government is trying to persuade private capital to fund loans without needing guarantees from federal agencies Fannie Mae and Freddie Mac. Mr Gundlach is close to signing a deal with a mortgage originator, who will offer loans that do not qualify for those guarantees and which can therefore be bundled into securities with a higher yield, which DoubleLine will place in its hedge fund.

“I think that people who are looking for the catalyst for the next mortgage meltdown are fighting the last war,” Mr Gundlach said, dismissing the notion that private-label mortgages would be subprime by another name. “I think the chance of that is really almost infinitesimal.”

No, the next crisis will be something else, he says. Something on that list. Something that requires 2020 vision.

Copyright The Financial Times Limited 2014.

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