Default rates on high-yield bonds may double as companies struggle with a protracted economic downturn even as the Federal Reserve props up valuations, said Jeffrey Gundlach.
The investment-grade corporate debt market has skewed toward lower quality BBB-rated debt, but if just 50% of that were to be downgraded, it could fuel a near doubling of the high-yield market, Gundlach said Tuesday on a webcast for his firm’s flagship DoubleLine Total Return Bond Fund.
Gundlach’s views reflect broad skepticism about the market’s connection to economic realities. He criticized the Fed’s emergency actions as buoying asset prices and spurring unsustainable corporate borrowing binges.
Risk assets such as equities and high-yield credit markets are responding to this support, and to government stimulus, disproportionately as the COVID-19 pandemic remains a threat to the recovery, he said.
“It’s foolhardy to believe that one can have this kind of a shock to an economy and it just gets healed through a one-shot deal” from the Treasury, he said.
Gundlach pointed out that the global GDP forecast is -3.9%, whereas the U.S. lags at -5% despite the country’s response to the COVID-19 crisis being “one of the highest in the world.”
Highlighting the effect of the weekly $600 stimulus checks, he called it a distortion of the personal-income spending picture akin to the Fed’s effect on the markets.
“This is a large incentive to stay on public assistance,” Gundlach said, noting that benefit payments have exceeded many workers’ regular income.
Gundlach also snubbed one of the market’s favorite trades on a U.S. recovery, saying he’s “betting against” the inflation-linked bond market. TIPS products have seen some of the strongest monthly inflows in four years, and market-implied expectations for inflation have touched a 2020 high. Gundlach repeated that the impact of the pandemic is deflationary.
Commenting on the recent sell-off, Gundlach compared the big tech players within the S&P 500 index to generals on the battlefield, saying their leadership is starting to trail.
“One week ago today, it seemed like stocks were going to infinity,” Gundlach said.
The S&P 500 is in “nosebleed territory. This is not a cheap market,” he added.
Other highlights from the webcast:
Gundlach manages the $52 billion Total Return fund with Andrew Hsu and Ken Shinoda. Its year-to-date return of 3.4% through last Friday ranked better than 47% of its peers, according to data compiled by Bloomberg. Its five-year average of 3.4% beat 75% of competitors.
[More: Gundlach predicts Trump will win]
FINRA's proposed rule filing would create a new 10-day fraud delay and nearly triple the maximum hold period for exploited senior investors
Fueled by a recent shot in the arm from private equity firm Carlyle, MAI adds a $490 million Atlanta RIA as it keeps building out its national footprint.
“Todd Burkhalter organized what is likely the largest Ponzi scheme in Georgia history,” said one FBI official.
With experience from Goldman Sachs and TD Ameritrade, the RIA's newest SVP hire adds to a recent wave of executive departures from hybrid Osaic.
Chicago-based Mesirow Fiduciary Solutions adds flexPATH's plan-level outsourced fiduciary book, boosting its retirement market reach to $164 billion.
Northern Trust’s Ken Lassner shows advisors how to convert volatility into after-tax portfolio gains
Dan Biagini of American Equity says the steady decline of pensions, longer lifespans and a reset in interest rates are rewriting how advisors build retirement income
