Wednesday, September 10, 2014

BOND KING SPEAKS

https://encrypted-tbn2.gstatic.com/images?q=tbn:ANd9GcTtU3XpPaPxG84glwCfo1RNEcirSue0T4x_14rKMZeHYuTPfe6JgQHere's an interesting read from yesterday about Jeffery Gundlach, the Bond King, as Barron's aptly named a few years back. Read it and draw your own conclusions. 
  • Hi there — we are just about to get started with Jeffrey Gundlach’s webcast. In the meantime, here are a few things to look out for
    • 1:14 pm
    • Where are interest rates headed?
    • by Ben Eisen
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    Gundlach said on CNBC Tuesday that he sees the benchmark 10-year Treasury note  10_YEAR yield staying in a range between 2.2% and 2.8% (it was at 2.50% on Tuesday). That assessment is driven in part by demand from investors who see U.S. yields as attractive relative to other developed economies, like Germany and Japan, where yields are much lower. Expect him to speak further on this theme.
  • Gundlach said during the same interview Tuesday that he doesn’t believe Federal Reserve Chairwoman Janet Yellen is in a hurry to raise interest rates, even if other Fed officials are. But that accommodation may just be the beginning. In a Financial Times interview, he said that a slow economy may well push the Fed to bring back its bond-buying programs by 2020.
    • 1:15 pm
    • What's the deal with housing?
    • by Ben Eisen
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    If you want to know what’s holding back the economy, look no further than housing, which Gundlach believes will suffer from continued demographic shifts away from home ownership. He suggested shorting home-builder exchange-traded funds during an investment conference in the spring.
  • Gundlach took a firm stance against the value of corporate credit this year, calling much of the investment-grade and high-yield sectors overvalued. But a mild junk-bond JNK  selloff this summer has made them less highly valued. Gundlach may talk about whether he thinks it’s safe to wade back in.
    • 1:16 pm
    • Is a stronger dollar here to stay?
    • by Ben Eisen
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    Gundlach’s CNBC interview Tuesday revealed a surprising call: He expects the dollar to strengthen substantially against the Japanese yen, which is likely to continue being devalued. Eventually, he sees the dollar USDJPY  rising to ¥200 (it was at ¥106.40 on Tuesday).
    • 1:16 pm
    • Where is there value in other assets?
    • by Ben Eisen
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    In the past, Gundlach has taken positions on specific stocks like Apple Inc. AAPL (some value) and Chipotle Mexican Grill Inc. cmg CMG (against). Gold and bitcoin have also been past topics. Investors will pay attention to what else is on his mind.
  • And we’re on. The webcast is called “Fixed Income Playbook” and the football metaphor is intentional. The big players in the financial markets are led by Fed’s Janet Yellen and ECB’s Mario Draghi, Gundlach says.
  • The big winners in fixed-income this year, Gundlach notes:
    • Hybrid convertible bonds, which have risen in line with equity strategies.
    • Junk bonds were a big winner last year, and they’re a lesser winner this year.
    • Emerging markets are strong this year though they lost last year.
    • Corporate, international developed markets, mortgages, and government bonds are all up on the year.
  • 10_Year
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    “This has been a really interesting year for investors, because there have been really no problems, only the smallest bumps in the road,” Gundlach says.
    Interest rates are down are down this year, and downside vol has been among the lowest in history amid predictions that this would be a year of increasing benchmark Treasury yields.
    • 1:33 pm
    • German bunds as an indicator
    • by Ben Eisen
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    Gundlach is talking about the divergence between U.S. Treasury yields and German bund yields, which has been a major theme this year. German bund yields have fallen, making Treasurys look more attractive to European and Japanese investors.
    “Watch European bond yields” as the most important thing to consider for bond investors, Gundlach says. European yields must rise for U.S. yields to rise. French 10-year yield would have to go over 1.75% for U.S. 10-year to get over 2.80%, he says.
    Read more: One chart shows the diverging fortunes of U.S. and Europe
  • Rates could move a bit higher, though, he says. Maybe to 2.65% on the U.S. 10-year yield from where we are today, though. We are at  2.50% at the moment
  • “It’s almost comical” that people continue to forecasts interest rates will rise, Gundlach says. He puts up a slide of a survey that shows near-unanimous forecasts of rising yields among economists. That forecast has been a real money loser, he says, but people continue to “fight this rally.”
    Read more: 100% of economists think yields will rise within six months
    • 1:42 pm
    • Why yields can't rise too much
    • by Ben Eisen
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    Countries like Spain, France, and Japan all have lower yields than in the U.S. Treasury market. You have to increase country-risk substantially to get more yield, Gundlach says.
    Another factor: mutual funds own a very small portion of the market. Even if mutual funds run for the exit, there are other buyers who will remain in place, Gundlach says.
    The Fed continues to hold onto the Treasurys it owns. And the Fed could even start buying bonds again — reentering QE — which they seem on track to do.
  • For three years in a row, forecasts for U.S. GDP have been downgraded. That may happen again. Yet “hope springs eternal” that each year will see 3% GDP growth.
    “It doesn’t seem like the economy is exhibiting the type of acceleration that so many people are talking about,” he says. Given that, he doesn’t think the Fed is in a rush to raise rates.
  • The economy in China is being downgraded, yet the Chinese stock market is strong. The Shanghai index  XX:000010 has risen in recent months, which confirms a buy signal, given the market is cheap compared to recent historical levels. A good option for high-risk investors, he says.
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    The dollar is likely to continue strengthening against key rivals. It’s at a 6-year high against the yen  USDJPY . He adds: “you don’t want to be long the euro EURUSD .”
    Taking that concept further, it means you don’t want to own foreign currency bonds, he says.
  • Inflation is a not problem, Gundlach says. We are seeing some signs of an uptick, but nothing worrisome.
    On wages: The “hollowing out of middle class wages and employment,” is what Yellen and co. are most worried about. The Fed would need to see this move much higher to start talking about seriously raising rates.
    Inflation-adjusted hourly earnings is “not making an progress,” he adds. It seems strange to think that with people losing purchasing power, you would actually raise rates.
  • For argument’s sake, Gundlach lists the reasons people cite for tightening monetary policy:
    • Unemployment rate is down
    • Number of people unemployed is lower
    • Utilization rate moving toward some sort of average
    • Apartment vacancy rate is improving
    • 2:03 pm
    • What the flattening curve means
    • by Ben Eisen
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    The yield curve has really changed this year with long rates coming down and short rates moving up slightly. For historical context, the yield curve flattened tremendously between 2004 and 2006, when the Fed was in a cycle of raising interest rates.
    This year, rhetoric on rate rises has increased a lot. Taking the market assumptions of rate hikes next June and overlaying it on the 2004-to-2006 period shows that the Fed could raise interest rates and the 10-year yield may not even sell off. In recent days, it seems almost like the 10-year wants the Fed to raise rates, Gundlach asserts.
    “So many market participants talk about the long end being vulnerable, but the message of the market has been the exact opposite,” Gundlach said. “The market is not signaling a blowout on the long end.”
  • “Much has been made of high yield inflows and outflows, but too much has been made of it,” Gundlach says.
    There’s not really a trend here in terms of outflows. Gundlach says he’s not really afraid of junk bonds — a shift in language from when he has called the market highly overvalued.
    Read what he has said in the past: Corporate bond rally is next to bust, some fear
    • 2:08 pm
    • But still doesn't prefer high yield
    • by Ben Eisen
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    “I would rather own a mix of non-high yield bonds than high yield, and sprinkle in stocks” for higher-risk securities, Gundlach says. He specifically highlighted emerging market stocks like India.
  • Corporate bond issuance is big, and that could be a reason for yields to back up a bit. However, European bond yields need to back up a lot for U.S. yields to make a serious move higher.
  • An outlook on bond sectors:
    High yield bonds were the most overvalued in history at year end, but now they aren’t as overvalued. Gundlach said he sold some investment grade corporate bonds to buy high yield bonds.
    Mortgage bonds have cheapened a bit since year end, but are still fairly valued.
    Emerging market bonds are still one standard deviation overvalued, but that’s less overvalued than U.S. corporate debt, so preference remains intact for EM.
  • Getty Images
    Home prices have risen while home ownership declined, Gundlach notes. That suggests the housing market is “kind of sick.” since it’s getting harder to afford a home.
  • Jeffrey Gundlach notes that he has brought down interest rate risk in his flagship fund. Interest rate risk is lower than the Barclays Agg but still higher than the 10-year Treasury note yield.
    About 62% of the fund is in government credit. Biggest exposures are in agency and non-agency mortgage-backed securities.
    Read more about his interest-rate risk strategy: Gundlach’s crisis-era bet holds rising-rate lesson
  • On to the Q+A: What would cause you to move duration to more neutral relative to interest rate risk? Gundlach says you need to higher rates.
  • On de-leveraging: Total debt has been falling due to mortgages defaults. Is that really de-leveraging? Yes, but it’s not necessarily healthy. Leverage remains high.
    • 2:26 pm
    • Dick Bove on mortgage crisis
    • by Ben Eisen
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    Gundlach knocks bank analyst Dick Bove, with whom he disagrees about the possibility for a mortgage crisis this winter. Says Bove is misinformed about this one point, though noting he’s a generally strong banking analyst.
  • David Tepper of Appaloosa Management said last week that we are at the “beginning of the end” of the bond market rally in the U.S.  after the last European Central Bank meeting, according to Bloomberg.
    Asked about that quote, Gundlach said “He is a little late to the party.” He noted that, “I said that when it was really true,” back in 2012 when U.S. 10-year Treasury yields put in record lows.
    Nonetheless, Gundlach added that we are at the beginning fo the end of the European bond market rally.
  • http://blogs.marketwatch.com/thetell/2014/09/09/jeffrey-gundlach-gives-market-calls-and-outlook/

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