Gundlach says high-yield bond defaults may almost double

Default rates on high-yield bonds may double as companies struggle with a protracted economic downturn even as the Federal Reserve props up valuations, said Jeffrey Gundlach.

The investment-grade corporate debt market has skewed toward lower quality BBB-rated debt, but if just 50% of that were to be downgraded, it could fuel a near doubling of the high-yield market, Gundlach said Tuesday on a webcast for his firm’s flagship DoubleLine Total Return Bond Fund.

Gundlach’s views reflect broad skepticism about the market’s connection to economic realities. He criticized the Fed’s emergency actions as buoying asset prices and spurring unsustainable corporate borrowing binges.

Risk assets such as equities and high-yield credit markets are responding to this support, and to government stimulus, disproportionately as the COVID-19 pandemic remains a threat to the recovery, he said.

“It’s foolhardy to believe that one can have this kind of a shock to an economy and it just gets healed through a one-shot deal” from the Treasury, he said.

Gundlach pointed out that the global GDP forecast is -3.9%, whereas the U.S. lags at -5% despite the country’s response to the COVID-19 crisis being “one of the highest in the world.”

Highlighting the effect of the weekly $600 stimulus checks, he called it a distortion of the personal-income spending picture akin to the Fed’s effect on the markets.

“This is a large incentive to stay on public assistance,” Gundlach said, noting that benefit payments have exceeded many workers’ regular income.

Gundlach also snubbed one of the market’s favorite trades on a U.S. recovery, saying he’s “betting against” the inflation-linked bond market. TIPS products have seen some of the strongest monthly inflows in four years, and market-implied expectations for inflation have touched a 2020 high. Gundlach repeated that the impact of the pandemic is deflationary.

Commenting on the recent sell-off, Gundlach compared the big tech players within the S&P 500 index to generals on the battlefield, saying their leadership is starting to trail.

“One week ago today, it seemed like stocks were going to infinity,” Gundlach said.

The S&P 500 is in “nosebleed territory. This is not a cheap market,” he added.

Other highlights from the webcast:

  • DoubleLine is now tactically positive on the dollar.
  • Gundlach tempered his bullish view on gold, though he’s still positive on its longer-term prospects, he said.

Gundlach manages the $52 billion Total Return fund with Andrew Hsu and Ken Shinoda. Its year-to-date return of 3.4% through last Friday ranked better than 47% of its peers, according to data compiled by Bloomberg. Its five-year average of 3.4% beat 75% of competitors.

[More: Gundlach predicts Trump will win]

The post Gundlach says high-yield bond defaults may almost double appeared first on InvestmentNews.

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