DoubleLine's Gundlach says Fed tacitly increasing stimulus

NEW YORK, Sept 18 Wed Sep 18, 2013 6:26pm EDT

NEW YORK, Sept 18 (Reuters) - Jeffrey Gundlach, chief executive of DoubleLine Capital, said on Wednesday that the Federal Reserve is effectively increasing its stimulus by not reducing its bond purchases.

In an investor webcast, Gundlach said the U.S. central bank's decision not to reduce its bond buying indicates a tacit increase in purchases because the U.S. Treasury is "issuing less debt."

"To a certain extent, they are increasing their stimulus by not reducing bond purchases, which I think is one of the reasons why bond market sentiment, and the dollar sentiment, and gold sentiment changed so much today," Gundlach said.

The Fed said on Wednesday that it would continue buying $85 billion in bonds per month and wait for greater evidence that economic progress can be sustained. The central bank also cut its forecast for 2013 economic growth.

The announcement surprised investors and sent the Dow Jones Industrial average and S&P 500 to record highs. Gold prices soared more than 4 percent in intraday trading and the dollar fell to a seven-month low against the euro.

The yield on safe-haven 10-year U.S. Treasury notes, meanwhile, plunged to 2.69 percent from 2.86 percent before the statement. Bond yields move inversely to their prices.

"I think we saw very powerfully today based upon the Fed's 180 on their idea of reducing stimulus, we've seen what seems to be a convincing change in psychology," Gundlach said.

On the webcast, which addressed the reopening to investors of the RiverNorth/ DoubleLine Strategic Income Fund, Gundlach said that the gains in the bond market Wednesday could also mark the "beginning of a cyclical sentiment change" toward closed-end bond funds.

The RiverNorth/ DoubleLine Strategic Income Fund has about 33 percent of its portfolio invested in closed-end bond funds. The fund, launched in Dec. 2010, reopened to new investors on Aug. 26 after closing to new investors in Mar. 2012.

Closed-end bond funds have sold off sharply on expectations of a pullback in Fed stimulus, and began trading at sharp discounts in the past four months after trading at premiums last year.

Closed-end bond funds were trading at an average premium of 1.8 percent in Aug. 2012, but traded at an average discount of 6 percent in Aug. 2013, according to Lipper data.

RiverNorth chief investment officer Patrick Galley and portfolio manager Stephen O'Neill manage the fund's closed-end fund holdings, while Gundlach sub-advises the fund using DoubleLine's opportunistic income and core fixed-income strategies.

"We've literally gone from greed to fear in a matter of a couple of months, and that all is due to interest rates rising," Galley of RiverNorth said in an interview on Sept. 10, in reference to price changes on closed-end bond funds from expensive to cheap over that period.

The fund, which has roughly $1.1 billion in assets, is down 2.29 percent so far this year, ahead of just 23 percent of peers, according to investment research firm Morningstar.

Galley said on the webcast Wednesday that he liked municipal bond closed-end funds, which he said offer tax-equivalent yields of 11.5 percent.

The Los Angeles-based DoubleLine had roughly $57 billion in assets as of June 30. Gundlach's flagship DoubleLine Total Return Bond Fund is down 0.88 percent so far this year, besting 94 percent of peers, according to Morningstar.

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