Gundlach Follows Up

On a June 9 webcast, he said facetiously, “I would like to borrow several quintillion dollars at negative interest rates," to hammer home just how mind blowing negative bond yields are. He followed this with, "Just take my advice, and don't buy bonds yielding less than zero."

While it is true that institutional and managed money can't sit on cash, other reasons do actually exist as to why investors might consider holding bonds with negative yields. An investor could bet on deflation, could be speculating on currency, or a government could be trying to control who owns its debt. Some investors might think that bond prices will rise, but this thought does not describe the management sentiment at DoubleLine at all. "The explosion to higher yield momentum virtually guarantees that yields are going up," opined Gundlach. "The bond markets have had a lot of chop with little change in yield."

Gundlach also cautioned against investing in emerging markets in local currencies. He mentioned that the dollar-denominated emerging markets index was up 2.8 percent through June 8, but that if you are invested in it in local currencies, "you are getting massacred, down 8.2 percent." Then he joked that investors who really want to get their heads handed to them are invested in German bonds. He told advisors that currency trends tend to last ten years.

Liquidity And The Structure Of The Bond Market

On stage at the art institute's Rubloff Auditorium, the three interest-rate commentators conversed about the structure of the bond market. Jim Bianco said that while the liquidity in the bond market is a problem, "it is not the problem," and added, "The structure of the bond market is the problem." Bianco explained that exchange-traded funds, such as the humongous one representing 20-year U.S. Treasury bonds, "is 70 percent more sensitive to a price movement than at the height of the crisis." He is concerned about trading limits being imposed on the bond markets.

Bianco labeled modern bond traders as "a Cisco router with a bunch of wires coming out." Gundlach volleyed, "Come to my trading floor, and tell that to my traders."

"All these algorithms come to the same conclusion at the same time," Bianco continued.

Rick Santelli, moderating, chimed in sarcastically, "But that's just going to bring boatloads of liquidity, right?"

Gundlach did acknowledge what he terms the "robo-advisors" and said, "It's a spreadsheet, and that's just going to be another driver of group investment think." He commented on Bianco's point about the extreme price sensitivity in Treasury ETFs and discussed the "gappiness of the Treasury market and lack of liquidity." To emphasize the changing structure of the bond market, Gundlach said, "You used to see a portfolio turnover of 400 percent with successful bond trading firms." He contends that now one of the primary drivers of alpha has been rendered useless.

Bianco stated that there is no bond trading liquidity when traders needs it because, "It's all zero percent sell and 100 percent buy or 100 percent sell and zero percent buy." This brings to mind a DoubleLine website publication which explains that lack of liquidity does not impair DoubleLine because its expertise lies in capturing inefficiencies in pricing that cannot be captured in the stock market because of the transparency and available liquidity.