DoubleLine's Gundlach worrying about junk bonds, not recession

NEW YORK (Reuters) - Jeffrey Gundlach, the chief executive of DoubleLine Capital, on Thursday said he is worried that junk bond investors could recover exceptionally low amounts of principal when their debt goes into default.

Jeffrey Gundlach, Chief Executive Officer, DoubleLine Capital LP., speaks at the Sohn Investment Conference in New York City, U.S. May 4, 2016. REUTERS/Brendan McDermid

Gundlach, whose Los Angeles-based firm invests roughly $95 billion, nonetheless sees little chance the U.S. economy will soon plunge into recession.

He said a key sign that often foreshadows a downturn, the quarterly unemployment rate falling below its three-year moving average, will not happen in the next year.

Speaking in a panel discussion at the New York Historical Society, Gundlach said junk bonds face a potential “secular” decline, with hundreds of billions of dollars due to mature in 2018 and 2019, when a similar sum of below-investment-grade bank loans also comes due.

Gundlach said that could flood the market with companies trying to refinance with capital that investors will not offer.

The result, he said, could be that when bonds default, investors may be able to typically recover perhaps a “frighteningly low” 15 cents on the dollar, down from the already depressed 35 cents they might get now.

Unlike in 2007 and 2008 when corporate credit and commercial real estate prices plunged, investors now face “a good old-fashioned credit cycle,” where defaults are “likely to be met with record-low recovery rates.”

Gundlach, who like Janus Capital Group Inc’s Bill Gross is sometimes called the “Bond King,” has made good calls over the last couple of years.

In 2014, he went against the grain in correctly projecting that U.S. Treasury yields would fall. The next year, he predicted that oil prices would tumble while a slowdown in China’s economy would weigh on global markets.

One area he expressed particular concern about on Thursday was Puerto Rico municipal bonds, many of which trade at deeply distressed levels.

“If you buy bonds at 65, it’s going to be scary,” he said, while adding that in investing generally, “the moment when it’s scariest is when you’re supposed to buy it.”

DoubleLine’s flagship DoubleLine Total Return Bond Fund, which invests mainly in mortgage-backed securities, ended April with $58.8 billion of assets, making it one of the world’s largest bond mutual funds.

Through Wednesday, the fund has returned 2.15 percent this year, lagging 93 percent of its peers, but its 5.11 percent average annual return over five years outpaced 98 percent of its rivals, Morningstar Inc said.

Reporting by Jonathan Stempel and Jennifer Ablan in New York; Editing by James Dalgleish