Most bond investors today are preoccupied by the issue of when
interest rates will rise and by how much. Jeffrey Gundlach says
those investors are looking at it all wrong. "The question isn't,
'What am I going to do with my investments today because I'm
worried that the Fed is going to stop this policy of low interest
rates?'" says Gundlach, who manages DoubleLine Total Return Bond
), a member of the
. "The question is, 'What should I do with my investments today,
understanding that the Fed is not going to stop this policy?'"
Gundlach says that if investors read between the lines of
published minutes from Federal Reserve meetings, they'll see that
the Fed has essentially declared that it sees no risks to current
low-rate policies and intends to continue with these policies for
the foreseeable future. The central bank is currently holding down
interest rates in two ways: by keeping short-term interest rates
near zero through its targeting of the federal funds rate (the rate
at which banks lend money to one another overnight) and by buying
$85 billion in long-term Treasuries and mortgage-backed bonds each
month. The yield on the benchmark ten-year Treasury hit an all-time
closing low of 1.40% in July 2012 and stood at 1.93% as of March
Because of the Fed's manipulation of rates, Gundlach says, there
is little risk in holding Treasuries today. "There's a floor on the
price of bonds," due to the support of the central bank, he says.
"Risk and volatility in government bonds have never been lower."
And, he says, that won't change until the Fed starts to see a
downside to its actions. Moreover, Gundlach says, given the size of
the U.S. national debt, the U.S. government can't really afford to
allow rates to move higher because that would add substantially to
the nation's debt service. (
Kiplinger's sees the yield of the ten-year Treasury
note creeping up
to 2.25% by the end of 2013.)
Although Gundlach has been purchasing Treasuries recently -- he
says he's bought more ten-year Treasuries this year than he has in
any of the past four to five years -- his total allocation to the
bonds is still low. The fund held 5.1% of assets in government debt
at the end of February. It had 45% in mortgage debt that's
guaranteed by government agencies, such as Freddie Mac and the
Government National Mortgage Association (because of their explicit
government guarantee, these bonds tend to move in sync with
Treasuries). It also held 28% in residential mortgage debt with no
such guarantee, and 17% in cash.
From its inception in April 2010 through March 22, the fund
returned 12.0% annualized, compared with an average return of 6.4%
year for funds that invest in taxable, medium-maturity bonds.
It's particularly important for investors to hold some
Treasuries, Gundlach says, because unlike most of investors' other
holdings, Treasuries don't move in the same direction as stocks.
Corporate bonds tend to fall with stocks when economic woes are
increasing, he says, while Treasuries do not. "What went up in
2008?" he asks. "Government bonds, and that's about it."