Investors should avoid highly rated shorter-maturity debt because the potential returns are too low, according to DoubleLine Capital LP’s Jeffrey Gundlach.
“There is absolutely no reason to own any investment-grade bonds inside of three years for sure,” Gundlach, chief executive officer of Los Angeles-based DoubleLine, said in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “And maybe even five years is getting to that category because it has no yield.”
The U.S. Federal Reserve has helped drive down bond yields by pledging to hold its target for short-term rates near zero until 2014 to support the economy. Yields on investment-grade corporate bonds with maturities in one to three years averaged 1.79 percent yesterday, near the record low of 1.46 percent reached in August 2011 and down from 5.35 percent at the end of 2006, according to Bank of America Merrill Lynch index data.
The central bank is unlikely to change its stance to fight inflation because it wants price gains, “so it’s not like you will be rolling over into higher yields any time soon,” Gundlach said. He said he’s focusing on mortgage debt, which offers better yields, “though not what we’d like to see.”
Gundlach’s $24.7 billion DoubleLine Total Return Bond Fund (DBLTX:US) has returned 4 percent this year, beating about 95 percent of rivals, according to data compiled by Bloomberg. The fund held about 78 percent of assets in mortgage-related securities as of March.
Facebook Inc. (FB:US)’s initial public offering today of as much as $16 billion, while likely to go well, “seems emblematic of a market top,” Gundlach said. The offering of new shares is the largest by a technology company.
“It’s like the tallest building,” he said. “The Empire State Building was built in 1929. Now, you have the tallest building in New York again being built. They go in cycles.”
He said investors don’t understand that dividend-paying stocks aren’t a proxy for bonds. These equities may have lower volatility than others, yet they’re still affected by drops in the stock market, he said.
“Dividend-paying stocks are kind of misunderstood,” Gundlach said. “It’s not a bond equivalent.”
To contact the reporters on this story: Jody Shenn in New York at firstname.lastname@example.org Tom Keene in New York at email@example.com
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