'Radical policy shock' dead ahead, warns DoubleLine's Gundlach

DoubleLine Capital LLC chief executive Jeffrey Gundlach predicts that investors can expect a ‘radical policy shock' from Washington that will zap the economy and push growth back into negative territory. In a speech at Morningstar Inc.'s conference, he forecast that Congress will raise taxes after the mid-term elections in November in a bid to reduce the U.S. government's crushing budget deficit. “Over the last 25 years, the policies have been predictable and stable,” he said. “The debt will need to be addressed with policy changes.” He warned that the next several years “will be one of the most difficult periods … that we'll face in our investing careers.” Still, the former chief investment officer of TCW Group Inc. offered some suggestions for advisers and their clients. At the top of that list: long-term Treasury bonds. “They've out-performed,” Mr. Gundlach said. “If you're going to own government bonds, be at the long end.” He also suggested that advisers consider purchasing mortgage-backed bonds issued by high-quality borrowers. Such debt offerings are relatively cheap, he said, and could generate up to a 5% yield during the tough times ahead. He also recommended municipal bonds — even though many investors appear to be spooked by the questionable credit-worthiness of state and local issuers. “I think the spreads that exist look pretty attractive today,” he said.