Tags: Bond King | Jeff Gundlach | Mortgage | Market

'Bond King' Jeff Gundlach: Bet on Mortgage Market as Rates Soar

(AP/Richard Drew)

By    |   Wednesday, 22 Mar 2017 11:28 AM

Jeff Gundlach, CEO of DoubleLine Capital, bets that the best way to play surging interest rates is by investing in mortgages, which comprise nearly 60 percent of his $3.1 billion SPDR DoubleLine Total Return Tactical exchange-traded fund (TOTL).

His strategy includes residential mortgage bonds, commercial real estate debt and agency securities, according to the latest portfolio holdings disclosure from State Street, sponsor of the ETF, CNBC.com reported.

But he has shied away from corporate bonds and Treasury securities, CNBC reported.

“The strategy has cost Gundlach's two-year-old ETF. Its 1.88 percent return from inception through February trailed the bond index, as Gundlach largely sat out a rally in corporate bonds, led by high-yield "junk" bonds,” CNBC explained.

“Whether Gundlach's big mortgage bet is a good strategy now will depend on which types of income investments do best amid rising U.S. interest rates,” CNBC explained.

“One benefit of stacking up on mortgage bonds is that they are relatively short term, helping reduce the portfolio's risk of losing principal value as interest rates rise on other bonds,” CNBC explained.

"We have one-third less duration risk than the aggregate average," Gundlach said in a March 7 webcast talking about one of his mutual funds, the Double Line Total Return Bond Fund, which has an even greater concentration of mortgages than the TOTL ETF.

As far as his disdain for corporate bonds, Gundlach said "there's not much juice left in the orange," because spreads between Treasuries and corporate bonds have moved so much already.

Meanwhile, some market experts see a big change on the horizon mortgage investing, courtesy of a strategic change by the U.S. central bank.

With interest rates on the rise, analysts say the Federal Reserve could start shrinking its unprecedented $1.75 trillion position in mortgage-backed securities by year-end. "That’s likely to leave more in the hands in private investors and result in increased hedging activity, a practice that has historically exacerbated swings in the Treasury market," Bloomberg recently reported.

“You’ll inevitably see more volatility,” said David Ader, the chief macro strategist at Informa Financial Intelligence.

In 2003, a surge in “convexity hedging” triggered widespread losses in Treasuries as benchmark yields soared 1.45 percentage points in two months. "Nobody is predicting anything close to a repeat. After all, the biggest hedgers back then were government-sponsored entities like Fannie Mae and Freddie Mac, which now own just a fraction of what they did and aren’t coming back," Bloomberg reported.

"But at a time when beleaguered bond investors are grappling with higher rates and the potential consequences of the Trump administration’s spending plans, the prospect of more volatility adds yet another thing to their list of worries."

(Newsmax wires services contributed to this report).

© 2017 Newsmax Finance. All rights reserved.

 
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Jeff Gundlach, CEO of DoubleLine Capital, bets that the best way to play surging interest rates is by investing in mortgages, which comprise nearly 60 percent of his $3.1 billion SPDR DoubleLine Total Return Tactical exchange-traded fund (TOTL).
Bond King, Jeff Gundlach, Mortgage, Market
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2017-28-22
Wednesday, 22 Mar 2017 11:28 AM
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