NEW YORK, March 10 (Reuters) - U.S. bond fund manager Jeffrey Gundlach on Thursday said he has liquidated 55 percent of his personal holdings in municipal bonds, his latest expression of doubt in the $2.9 trillion market.
The DoubleLine Capital chief executive officer said he was not sure the dogged U.S. public finance market would retrench, following improvement in recent weeks. But it has “the hallmarks of a market that could collapse” due to possible defaults and interest rate swings, he said.
The risk of rising and falling interest rates is an unusual danger to the market, Gundlach said.
Long-term municipal bonds are more interest rate-sensitive than short-term securities, leaving their prices vulnerable to a rise in market yields. If interest rates fall, it will likely be because the economy is weakening, adding pressure to an already dire situation of deficits and budget debates that have raised default fears, he said.
“I have a lot of money in munis and I got tired of the adrenaline surge every time the statement came,” Gundlach told investors at a luncheon. Instead of the usual joy one gets, “suddenly it turns into ‘I don’t even want to look at this thing.’”
He invested the proceeds, whose size he did not reveal, in the DoubleLine Funds, he said.
Cities and states have depended on municipal bonds for decades to finance their budgets. Defaults are rare, leaving investors complacent about the possibility, Gundlach said.
The highly regarded fixed-income manager and 2006 Morningstar bond manager of the year recently formed a joint venture, RiverNorth DoubleLine Strategic Income Fund, (RNSIX.O) (RNDLX.O) to take advantage of a municipal bond slump. Closed-end municipal bond funds could drop as fear resurfaces, creating a buying opportunity in those assets, he said.
Gundlach reiterated his view that the municipal bond market is “badly owned,” meaning it is held not because a credit is good or bad, but because of the tax-free advantage. He has likened it to banks holding ill-fated AAA collateralized debt obligations because they required little capital of the institutions.
“Nobody owns California general obligation bonds because they think it’s an improving credit story,” he said, drawing chuckles from the audience.
Gundlach’s view echoes those of half or more of traders and portfolio managers who in a recent MMD survey said they were bearish about the market for the next month or two. A week earlier, 10 percent of traders in the survey were bearish and 40 percent of money managers were gloomy about performance.
Yields on AAA-rated munis that had been well over 100 percent that of comparable Treasuries early this year are now closer to customary levels of four-fifths those of taxable Treasuries. A 10-year muni’s yield as of Tuesday was 86.5 percent of the yield on a similar Treasury issue.
“I would bet dollars to doughnuts that the high gets taken out with the fear and uncertainty surrounding the solution to this budget problem,” Gundlach said. That could mean long-term municipal bonds drop 15 percent to 20 percent, he added. (Additional reporting by Michael Connor in Miami; Editing by Dan Grebler)