Mortgage-backed and junk bonds surged in line with stocks last week, while Treasurys hit the skids, leading star bond-fund manager Jeffrey Gundlach to call the bond market psycho.
The ABX index, which tracks mortgage-backed securities, soared 20 percent last week.
“You had a monstrous reversal of what had been a pretty big leak down,” Gundlach, who runs the $12 billion fixed income firm Doubleline Capital, tells CNBC.
“Traders on Wall Street are just wrung out like a towel, because they are trying to hedge securities that are losing value. And then all of a sudden you get this relief rally on Greece.”
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Prior to the bailout European authorities worked out for Greece last week, Gundlach saw a real chance for a “meltdown” in the U.S. bond market over Europe’s crisis.
So the market is going up and down like a roller coaster. “I don’t think I’ve seen trading so schizophrenic in the credit markets since late 2008,” Gundlach says.
“I’ve got to believe there are a lot of losses. When you get dealt that type of wacky volatility, it’s impossible to make money.”
While the 10-year Treasury yield has dropped back down to 3.10 percent this week, Tomohisa Fujiki, an interest-rate strategist at BNP Paribas, tells Bloomberg that technical indicators point to higher rates.
“Yields may next test 3.3 percent or 3.5 percent,” especially if the outlook for the U.S. economy continues to improve, he says.
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