One of my recommended mutual funds, DoubleLine Total Return Bond, changed its allocation recently. The portfolio was about half weighted to treasury bonds starting in the spring, when interest rates rose briefly. Recently, manager Jeff Gundlach trimmed his treasury bond holdings because of what he calls “market divergences.”
Here’s how Gundlach explained things in a recent interview with Advisor Perspectives, a web site for financial advisors:
Now the two-year Treasury has gone down again in yield, and it has actually gone to a new low. It went lower than that 75 basis point or so level seen in late 2008, and now it’s down to about 50 basis points. The five-year Treasury went almost all the way back down to where it was at what I call the orthodox low it made in December 2008, but it didn’t actually match that low, and certainly didn’t break through it. Basically it met it. The 10-year Treasury didn’t even get really that close to its low in late 2008. It got to about 2.4%, and the 30-year Treasury only got down to about 350 basis points, almost a full hundred basis points away from its low.
That’s a classic divergence where part of the yield curve, the one that is controlled by the Fed, goes down to a new low, but other parts of the market don’t corroborate that type of activity. The orthodox low in yields will ultimately prove to have come in late 2008.
Gundlach thinks we’re forming a low in interest rate, a process that could last into 2011. He doesn’t think the 10-year treasury will repeat its prior low, so there’s not much return potential left in treasury bonds. Gundlach says he’s not bearish on treasuries, that it could be nine months or more before rates rise and cause bond prices to fall. But he thinks the risk and reward of owning treasuries is not a good trade off and that you’ll miss out on opportunities in other investments.
In the full interview, Gundlach discusses high yield bonds, mortgages, and more.