Gundlach Says Starvation for Yield Creating ‘Mass Psychosis’

(Bloomberg) -- Investors who rushed into bonds last week will face a hard time making money as the market finds a bottom and rates begin to rebound, according to Jeffrey Gundlach, chief executive officer of DoubleLine Capital.

“There’s something of a mass psychosis going on related to the so-called starvation for yield,” Gundlach, whose firm manages $102 billion, said during a webcast Tuesday. “Call me old-fashioned, but I don’t like investments where if you’re right you don’t make any money.”

Treasuries suffered their steepest two-day selloff this year, as demand sagged at this week’s government auctions after yields tumbled to unprecedented lows last week.

Benchmark 10-year note yields jumped 15 basis points through Tuesday, reaching the highest this month at 1.53 percent, after a gauge of demand at a $20 billion sale of the securities sagged to the weakest since 2009. It was the second of three note and bond offerings this week, after an auction of three-year notes on Monday also attracted the weakest demand in seven years, sparking a selloff across maturities.

The slump left the Bloomberg U.S. Treasury Bond Index little changed in July, after it surged 5.4 percent through June 30 in its best start to a year since 2010.

Fund Gains

Gundlach said on the webcast that he expects it will take until next year for 10-year Treasuries to climb back above 2 percent.

The Los Angeles-based money manager discussed his $7.1 billion Core Fixed Income Fund, which returned 6.1 percent this year through July 11, beating 65 percent of its Bloomberg peers, and his $260 million Flexible Income Fund, which is up about 3.3 percent. He said Flexible Income’s average effective duration of less than two years makes it appropriate for investors preparing for an environment of rising interest rates.

Gundlach also said:

• Policy responses to insolvency concerns for European banks are likely to be “bond unfriendly,” creating inflation “that would take everybody by surprise.”
  
  
• “Watch out” for the stock market high being rejected. He said he’s been making money with “a cautious view of the stock market” by shorting some equities.
  
  
• Emerging-market debt, especially in local currencies, is a better bet for now than U.S. junk bonds.
  
  
• Oil prices are more likely to fall below $40 than exceed $50 because of high inventories.
  
  
• He’s “quite sure” that Donald Trump will be elected U.S. president.
  
  

--With assistance from Garfield Reynolds To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net. To contact the editors responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net, Josh Friedman, Russell Ward