Who is excited about the chance to buy 10-year Treasurys yielding 3 percent? Not DoubleLine CEO Jeffrey Gundlach, who spoke yesterday at an event in New York City.
The widely watched bond fund manager offered a list of reasons why advisors and investors may find longer-dated government securities—and not just U.S. bonds—simply not attractive.
The fact that the S&P 500 peaked on January 26, Janet Yellen’s last day as Federal Reserve chairman, may be more than pure coincidence. Gundlach said he suspects the new Fed chair, Jay Powell, won’t be as acutely sensitive to minor signals from the financial markets as his predecessors, especially if the economy remains strong.
Noting that many pundits on CNBC and elsewhere expect the Fed to ride to the rescue as they have before, Gundlach said they could be disappointed. Powell may well do “diddly” unless signs of real economic and financial pain surface.
One would think that large institutional investors in Japan and Germany, places where 10-year sovereign debt yields less than 1 percent, would jump at the chance to buy U.S. government-backed bonds with yields that triple their own domestic counterparts. But the U.S. dollar has been declining for the better part of two years.
Gundlach noted that the cost of hedging currency risk is very high, so once that is factored into the investment, the potential returns diminish dramatically.
Then there is the burgeoning supply of Treasury bonds anticipated over the next few years as federal budget deficits climb to the $1.1 trillion level. Gundlach also suggested that quantitative tightening, or the Fed’s decision to shrink its balance sheet after purchasing trillions in Treasurys after the financial crisis, is playing a role in rising government bond yields.
Some optimists think that pension funds, insurance companies and other investors needing to match assets against liabilities will buy bonds exactly for this purpose. But Gundlach noted that many have already done this.
Even gloomy investors don’t find these yields particularly appealing. In March, Gundlach spoke at John Mauldin’s Strategic Investment Conference, an event that attracts many intelligent investors but is also populated with more deflation pessimists than the broader investor world.
More than a few of them would be inclined to look at 2.85 percent Treasurys as a great opportunity to earn capital gains because they think the yield is going to the 1 percent area. When Gundlach asked the 800 or so attendees at Mauldin’s event if they thought a 2.85 percent Treasury yield was attractive, only about 10 hands went up.