Taps Coogan – June 15th, 2023

Jeffery Gundlach, the founder of DoubleLine Capital and the manager of one of the largest funds in the world, spoke with CNBC after yesterday’s FOMC meeting to share his bullish outlook on bonds:

 

Some excerpts from Gundlach:

“The fixed income market is very cheap compared to the stock market. You can get 5% in a very high grade bond portfolio with no default risk. You can get 8%, 9%, 10% in a well positioned actively managed fixed income portfolio that is taking the middle part of the capital structure… What people don’t understand is that thanks to the fact that rates went up a lot and that spreads are somewhat elevated… you’re talking about prices that went from 100 on these credit bonds down to 80, 70, 60, 50 because of those rate increases and some of the fears. When you buy risky credit, or moderately risky credit in fixed income, at a price of 100, you’ve got a bad proposition because they can’t go up very much… and you have all that downside. If you start out with a portfolio that starts out at 60 or 65 cents on the dollar you’ve got stock market like upside… and the downside can’t be any worse (than stocks)… This is an exciting time for the fixed income parity trade, if you want to call it that, because we are back where we were in 2012 or so because you can get yields and you can risk manage very precisely.”

It’s a compelling argument, though with cash yielding over 5% (and rising?), it is ultimately a positive carry bet on rate cuts. Yields on investment grade bonds are still too low if a 5%-5.5% risk free rate is the new normal.