Bloomberg News

Gundlach Has Zero Exposure to Europe, Favors Corporates

September 28, 2011

(Adds comment on corporates beginning in third paragraph.)

Sept. 28 (Bloomberg) -- Jeffrey Gundlach’s DoubleLine Capital LP is invested only in U.S. dollar-denominated assets in a bid to avoid losses stemming from Europe’s debt crisis.

“All of our international exposure is in dollars,” Gundlach, the founder and head of Los Angeles-based DoubleLine, said at a panel sponsored by the firm in New York today. “There’s a big loss in Europe and all we want to do as investors is make sure as best we can that we’re not the ones taking the loss. How do you do it? No investments in Europe.”

DoubleLine is also avoiding U.S. banks because of possible exposure to crisis and favors investment-grade corporate debt because defaults may rise in lower-rated bonds next year. Gundlach, who managed the top-rated intermediate-term U.S. bond mutual fund for 15 years, began cutting exposure to junk bonds in the fourth quarter of 2010, even as Bank of America Corp. and Goldman Sachs Group Inc. strategists forecast the riskiest debt to return as much as 10 percent this year.

“Investment-grade corporate bonds have done very well,” said Gundlach, who has attracted $17 billion in assets since founding DoubleLine in December 2009. “The investment-grade bonds DoubleLine holds “had a bad August with all risk assets, but prices are nearing their highs. It’s a totally different story in below investment-grade, where we see the market really has collapsed.”

TCW Lawsuit

Gundlach, who was fired from TCW Group Inc., won a $66.7 million jury award on Sept. 16 against his former employer for unpaid wages. Gundlach, 51, who has to share the money with three of his colleagues, was also found to have breached his fiduciary duty to TCW and misappropriated its trade secrets. The Los Angeles jury awarded the company no damages on the breach claim. A judge will determine damages on the trade-secret claim.

Investors worldwide have been piling into government debt such as U.S. Treasuries or German bunds as they seek a refuge from Europe’s widening sovereign debt crisis. The European Commission is resisting a push to impose bigger writedowns on banks’ holdings of Greek government debt than those agreed on at a July 21 summit, a European official said today on condition of anonymity because the deliberations are private.

The euro has fallen 1.7 percent during past three months against nine developed-market peers, taking its 12-month decline to 2.3 percent, according to Bloomberg Correlation-Weighted Currency Indexes.

High-Yield Debt

Junk bonds have declined 2.1 percent this month for a loss this year of 0.1 percent, Bank of America Merrill Lynch index data show. Spreads on speculative-grade company notes, rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s, have widened 62 basis points this month to 792 basis points after soaring to 750 basis points on Aug. 26.

“I like junk bonds a lot better than I did six months ago, but I am not ready to buy them yet,” he said. “The high yield bond market is going to have a default problem in late 2012 or 2013.”

Moody’s Investors Service forecast the speculative-grade default rate will “remain low” at 2.2 percent a year from now, compared with 2.1 percent in August, according to a Sept. 22 statement. That compares with a peak of 14.5 percent amid the credit crisis in November 2009.

“We’re not going to be ready to jump back in to high yield basically until Greece is solved,” said Bonnie Baha, head of DoubleLine’s global developed credit group.

Even with the yield on the 10-year Treasury notes below 2 percent, long-term government bonds make sense as a hedge, Gundlach said.

--Editors: Dave Liedtka, Paul Cox

To contact the reporters on this story: Liz McCormick in New York at emccormick7@bloomberg.net; Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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