Jeffrey Gundlach hasn’t had many kind words for peers who piled into inflation-linked bonds in the years following the financial crisis, famously calling them investments “for losers” as recently as 2014.
But now the chief investment officer of DoubleLine Capital says the bonds, which rise in value with inflation, are becoming more attractive. While Mr. Gundlach hasn’t yet bought any Treasury Inflation-Protected Securities (TIPS), predicting that their prices may fall in coming weeks, he says investors seeking to own longer-term government bonds may be better off with them.
“If an investor wants to own longer-term government bonds, I would recommend they own TIPS,” Mr. Gundlach, whose Los Angeles-based firm managed $102-billion (U.S.) as of June 30, said in an e-mail Thursday. “I would focus on TIPS of at least five years in maturity.”
Mr. Gundlach is warming up to the securities, which tripped up investors including Bill Gross in recent years, in anticipation that governments may start to use fiscal stimulus to boost economies that are still struggling after years of ultra-low or even negative interest rates. Such a pivot could drive up interest rates and inflation, so fixed-income investors should position themselves defensively, Mr. Gundlach said earlier this month.
TIPS have returned 6.3 per cent so far this year, compared with a 4.7-per-cent gain for the broad Treasury market, according to data compiled by Bloomberg. Thursday’s $11-billion sale of 10-year TIPS saw strong demand, with a bid-to-cover ratio of 2.59, the highest since May, 2014.
“TIPS look pretty good,” said Jonathan Beinner, global fixed-income chief investment officer at Goldman Sachs Asset Management, in an interview Friday on Bloomberg Television. “Inflation is not yet at the target. But if you look at the TIPS market, what is embedded in that price, they are certainly less expensive than nominal bonds.”
Betting on TIPS has proven difficult in recent years as inflation remained subdued. In early 2013, Bill Gross, who was still running the Pimco Total Return Bond fund at that time, bought inflation-linked Treasuries in a bet that the three-decade bull market in bonds had ended and inflation would go up. While Treasuries subsequently fell as Mr. Gross had predicted, so did inflation expectations, amplifying rather than limiting losses for Mr. Gross. His fund fell 4.7 per cent in May and June of that year, prompting what were record withdrawals at the time.
Mr. Gundlach stayed away from TIPS at the time, calling them a “disaster” and a “trap.” In a webcast in December, 2014, he said the securities were “for losers” for the time being. He scaled back his aversion in mid-2015, saying he no longer hated the bonds. But the real turning point, he said on Thursday, came on July 6, when he turned “maximum negative on the 10-year nominal” Treasury.
The yield on 10-year U.S. Treasuries bottomed that day at 1.32 per cent, according to data compiled by Bloomberg. It has since risen to 1.62 per cent, and Mr. Gundlach is predicting it may go to 2 per cent before the year is over.Report Typo/Error