Jeff Gundlach on High Yield Bonds, Ginnie Maes, Treasuries (CNBC, 3/9/2011)

Jeffrey Gundlach on CNBC
This video is old, but still relevant. Jeffrey Gundlach, CEO of DoubleLine Capital, which manages about $9 billion (check out DBLTX, the DoubleLine Total Return Bond Fund), gave his views on high yield bonds, Ginnie Mae securities and Treasuries on CNBC on 3/9/2011. He released a research report in January and was featured in Barron's ("The King of Bonds") in February. According to his website, Gundlach will appear on CNBC's Strategy Session on April 14. My next post will feature the deflation and muni bond segments.

Gundlach on high yield bond volatility, spreads to Treasuries and Ginnie Maes (not from an official transcript):
"The problem with high yield bonds is that their volatility is so high and they are priced for the reality of low defaults. For the last 12 months defaults on high yield bonds are under 1%; they were back in double digits just 2 years ago.."
"People compare high yield to Treasuries and they say Treasury bonds yield about 2%, and they use the whole basket of Treasuries; and then they say high yield to no losses, the way they quote it, yields about 6.75%. So it's a spread of almost 5 points; and they say, hey, that's historically average, so what's wrong with that? I point out that the volatility of high yield bonds is a lot more like the 20-year Treasury. It has a standard deviation persistently of 12. The Treasuries that they are comparing it to have a standard deviation persistently of 5. So you really can't compare high yield to the total basket of Treasuries, you need to compare it to the long Treasuries... The actual spread is only about 225 basis points, which is about as low as it's been in history"

"To me I would rather buy longer duration Ginnie Maes, where I can get 6% with a Government guarantee, than mess around with all that volatility in a price perfection market that will experience defaults"
"For now high yield will probably give a decent return because defaults will be low, but you probably won't outperform Treasuries in high yield is my view."

"The stuff that was issued in 2009, that is not good quality. Nor was 2010, and it takes about 3-4 years... (he was cut off)."
The seasoning of issuance:
"A lot of these companies what they did is they refinanced bank debt, where they were paying LIBOR +250 or 300. They had a nice low rate they were paying. Why did they go and take out something at 9-10%? They were afraid of rollover risk. They can't really afford 9 or 10%. They are hoping that their companies will grow into it. That is the seasoning aspect of high yield bonds. Once you get out to 2013, or 2012 late in the year, it might be time where these companies can't make their payments anymore and defaults will go up. Unless the economy improves... (which is not his view)

High Yield Cracks? courtesy of CNBC



FYI: The St. Louis Fed now has charts of effective yields and option-adjusted spreads for Bank of America/Merrill Lynch US Corporate Bond and High Yield Bond Master II Indexes. More information here: Muni, Corporate Bond Index Yields, Spreads, Nikkei VIX, Hang Seng VIX (Links). Check on how the spreads are calculated.

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