Gundlach reverses course on interest rates

“We don't see signals that the interest rate increase is over," according to the bond superstar.

Aug 29, 2013 @ 2:29 pm

By Jason Kephart

Bond superstar Jeffrey Gundlach believes interest rates on the 10-year Treasury note are heading to above 3% this year, he said Thursday during an interview on CNBC.

As recently as the end of June, Mr. Gundlach, founder and chief executive of DoubleLine Capital LP, predicted the rate would fall as low as 1.7% by the end of the year.

“Where we are right now is looking for signals on interest rates,” Mr. Gundlach said during the interview.

“We don't see signals that the interest rate increase is over. Fear and loathing is the sentiment now,” he said. “The market's gone from saying, 'I don't care about volatility, I just want income,' to 'I don't care about income, I don't want volatility.'”

One of the indicators Mr. Gundlach is watching to determine when this sentiment ends is discounts on closed-end bond funds.

Closed-end bond funds have a fixed number of shares so, depending on the demand, or lack thereof, the shares will trade at a premium or discount to the net-asset value of the fund's underlying bonds.

Before interest rates started to spike in May, the average closed-end bond fund was trading at a premium of more than 2%.

In the aftermath of the 10-year Treasury's abrupt rise to today's rate of 2.7%, up from 1.6% in May, those same bond funds are now trading at an average discount of 7%, according to Closed-End Fund Advisors Inc.

Because of the wide discounts, the funds have a cushion of safety against a further rise in interest rates, which move inversely to bond prices, and have yields of around 8%, Mr. Gundlach said.

“No one wants to buy them because of the fear and loathing,” he said. “We're waiting to see when people start buying those.”

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