DoubleLine's Gundlach says bond market selloff nearing end

NEW YORK Thu Jun 27, 2013 11:28am EDT

Jeffrey Gundlach, star bond investor and head of DoubleLine Capital LP, is photographed during an interview in New York May 15, 2013. REUTERS/Adrees Latif

Jeffrey Gundlach, star bond investor and head of DoubleLine Capital LP, is photographed during an interview in New York May 15, 2013.

Credit: Reuters/Adrees Latif

NEW YORK (Reuters) - Jeffrey Gundlach, head of DoubleLine Capital LP, said on Tuesday that the selloff in the bond market is likely to end in the next few weeks and that now is the time to consider buying riskier debt.

In an investor webcast, Gundlach characterized the selloff in the bond market as a "liquidation cycle" that will end within weeks, once the benchmark 10-year Treasury hits a high of 2.75 percent. In light of this, investors should consider riskier bonds, he said.

"The momentum of higher interest rates is slowing," Gundlach said. "Now is the time to be thinking about taking advantage of the price discounts that exist in some of the risk areas of the bond market," he added.

Bond markets have seen a wide selloff since Federal Reserve Chairman Ben Bernanke told Congress on May 22 that the central bank could reduce its $85 billion in monthly purchases of Treasuries and agency mortgages this year.

Bernanke rekindled fears when he said at a news conference on June 19 that the central bank could reduce its purchases this year and halt them around mid-2014. The Fed's bond-buying has kept interest rates low and fueled a rally in riskier assets such as U.S. stocks.

Gundlach, chief executive and chief investment officer of DoubleLine, said that Tuesday marked the "first encouraging signs" of the selloff becoming excessive, since investors are starting to view those bonds as undervalued.

Tuesday's webcast was to mark the launch of the DoubleLine Floating Rate Fund (DBFRX.O), which will open to the public on July 1. DoubleLine portfolio managers Bonnie Baha and Robert Cohen will manage the fund.

The fund will invest at least 80 percent of its assets in floating rate loans, according to the fund's prospectus, which are protected from rising interest rates by being pegged to floating-rate benchmarks. Cohen said on the webcast that companies are generating strong cash flows and can support the debt on their balance sheets.

The effective yield on the Standard & Poor's/LSTA U.S. Leveraged Loan 100 Index is currently 5.15 percent. The index has earned a return of 2.51 percent so far this year, despite having fallen 0.39 percent so far in June.

The yield-to-worst on the Barclays U.S. Corporate High Yield Index, by comparison, has risen to 6.94 percent from its record low of 4.97 percent on May 7. The index has tumbled 3.57 percent this month and has earned a return of just 0.43 percent so far this year. Yield-to-worst indicates the lowest potential yield on a bond without the issuer defaulting.

Floating-rate bank loans have been a refuge for investors concerned about rising interest rates. Investors have poured $30.5 billion in new cash into loan funds so far this year, which is on pace to trounce the previous annual record of $18.2 billion in 2010, according to Lipper.

While loan funds have gained, some of the largest bond funds have seen outflows this year. The PIMCO Total Return Fund, the world's largest bond fund, suffered outflows of $1.3 billion in May, its first since 2011, according to Morningstar.

Gundlach's flagship DoubleLine Total Return Bond Fund DBTLX.O had inflows of $294 million last month, according to Morningstar. Demand for the fund was hit, however, by the recent selloff in bonds. The fund suffered outflows of $681 million between May 22 and June 12, according to Lipper, marking its biggest streak of outflows since its inception in April 2010.

The DoubleLine Floating Rate Fund is down just 0.49 percent since May 21, the day before the wide selloff in bond markets began, according to Lipper. The average U.S.-based bond fund, meanwhile, has fallen 4.3 percent since May 21.

Cohen said on the webcast that the firm will seek to raise under $6 billion for the new fund. The Los Angeles-based DoubleLine has roughly $60 billion in assets.

(Reporting by Sam Forgione; Editing by Mohammad Zargham)