DoubleLine founder Jeffrey Gundlach is “excited for 2023” after last year’s bond market selloff, reports an article in CityWire. Gundlach made the remarks during a recent webcast, where he also relayed that building “portfolios in fixed income that yield 6% to 7% and low double digits depending on risk tolerance” would now be a possibility. He highlighted that mortgage-backed securities and commercial mortgage-backed securities could be used to offset long-term U.S. Treasury bonds as a hedge.
2022 was the worst year on record for the Bloomberg US Aggregate, falling 13% in the wake of interest rate hikes and high inflation. At the start of 2022, the 10-year US Treasury yield stood at 1.5% and rose to 3.5% by the end of the year, signaling potentially higher returns for investors, the article details. But amid that rosy forecast, Gundlach also believes that a recession is on the horizon and that the Fed won’t be able to engineer its hoped-for soft landing, having tightened monetary policy too much, too quickly. He points to the inverted yield curve as a clear sign of a looming recession, as well as internal gauges at his firm that are also signaling a downturn. Inverted yield curves have always preceded a recession, though some economists believe there are various factors making this particular inversion not as clear-cut.
Gundlach co-manages the firm’s flagship fund, the DoubleLine Total Return Bond which holds $33.2 billion. Currently, 9.4% of the fund’s assets are in government bonds, while 9.3% is in non-agency commercial mortgage-backed securities. In his remarks, Gundlach advised investors to pay more attention to what the market says than the Fed, adding that it is “absurd to think inflation can go from 9% to 2%, and then stop,” according to the article. And while previously Gundlach had favored the bank loan sector, he’s now wary of it, as there will likely be credit deterioration if the Fed continues to raise rates. He’s also turning more toward foreign equities than U.S. stocks; after years of outperformance after the 2008 financial crisis, bonds are now cheaper than stocks. Emerging markets in particular look priced to garner better returns in the long-run than U.S. stocks, Gundlach said, telling investors that the “trend line in favor of US has been broken and reversed.”