During this interview with CNBC, Jeffrey Gundlach explains why bonds have four times the payout of the stock market right now. Here’s an excerpt from the interview:
Gundlach: You can get all these yields and have all this upside.
What people don’t understand is thanks to the fact that rates went up a lot. And the fact that spreads on risk assets and bonds are somewhat elevated.
They’re down from where they were, but they’re about 450 basis points. You’re talking about prices that went from 100 on these credit bonds down to 80,70,60,50. Because of those rate increases and some of the fears.
When you buy risky credit or moderately risky credit in fixed income at a price of 100 you have a really bad proposition because they can’t go up very much.
If the prices go up, they’ll just refinance them, because the prices going up means they can do new issue bonds at lower yields.
So they’ll refinance them and take your coupon away. And you have all that downside.
If you started at 100, you can go to 80,70,60,50 which is what happened.
But if you start out with a portfolio of bonds at 60 or 65 cents on the dollar, you’ve got 50% upside to par. You have stock market like upside.
I would argue even greater upside than the stock market from these valuations. And the downside can’t be any worse.
Stocks can easily drop 50%. We’ve seen it so many times in my career and the bonds aren’t going down to 32.5 unless there’s a massive default problem.
If there’s a massive default problem, stocks are going down more than 50% because they’re junior in the capital structure.
So fixed income right now has four times the payout of the stock market if you do this kind of barbell I’m talking about, and you can hedge it with treasuries.
Because long bonds are not at 1% or 2%. 10-Year treasuries up near 4%. And it could very easily fall to 2% in the wrong type of environment for stocks or risky assets. That’s a 20% gain, plus coupon.
The long bond could give you 40% gain, plus coupon, that could offset your risk.
This is an exciting time for the fixed income risk parody, if you want to call it that trade, because we’re back where we were in 2012 or so, where you can get yields and you can risk manage very precisely.
You can watch the entire discussion here:
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