Wednesday, March 9, 2011

Interview with Jeff Gundlach from Double Line

An interview with Barron's New Bond King, who discusses the high yield and muni markets.

High Yield Market (Appears at the 2 minute mark)

“Priced to perfection market” with high volatility that will experience defaults.

Currently yielding 6.75% and priced for low defaults (currently under 1%, no defaults in January). The average default rate is 4% per year. The loss adjusted yield looks more like long term treasuries at 4.50/4.75.

Volatility of HY is like a 20 year treasury with 12 standard deviation, so don't compare to basket of Treasuries with a std deviation of 5. That spread vs. 20 year treasuries is only 225 bps.

Would rather buy long duration Ginnie Maes where he can get 6% with government guarantee.

The market is not about to collapse. Will give a decent recent right now but won't outperform treasuries.  We may not see defaults till 2013. 2009 and 2010 issuance was not good quality and it will take 3-4 years for defaults. Why did issuers take out low yielding bank debt for higher yielding bonds? Because of rollover risk (bank debt is short term).

Starting to see garbage issuance again - cov-lite. Never buy PIKs. Head for the hills when PIK issuance takes off.

People hungry for high yield. Not a fan of dedicating money to HY portfolio. Manager is forced to keep investing in the asset class regardless of valuations when fund inflows are strong.

Economy will be on a low growth trend line for a long time

Muni Market
The market has “bad fundamentals” and is “badly owned” - people buy because of a technical benefit - tax benefit - but not fundamental analysis. Similar to subprime – a Triple A market that had never traded below par.

Muni market is headed lower but agnostic on whether it will crash. Expects at least a 15-20% drop in muni market.  When markets start to fall, muni bond holders will sell out of fear.

What he likes
Long term govvies. Rate rise is overblown against a weak economy.

Equity Market
If deflation wins, we will see the S&P go down to the 500 level.

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