Doubleline’s Gundlach sells Treasuries, buys corporate bonds

Jeffrey Gundlach, who predicted in June that the 10-year Treasury yield would fall to 2.5 percent, reduced DoubleLine Capital LLC’s holdings of U.S. government debt after the security failed to set a record low level.

Gundlach, who founded DoubleLine in December and previously co-managed the top-ranked TCW Total Return Bond Fund, last week cut his Treasury holdings to a “small underweight” from “overweight” as the 10-year yield failed to mirror a breach to a record low by the two-year note and a near record by the five- year security this month.

This “divergence in behavior across the yield curve is very significant,” said Gundlach, who oversees $4.8 billion in assets in Los Angles as chief executive officer of DoubleLine. “So while the fundamentals for low rates remain compelling, the message of the market action suggests that much of these now widely recognized fundamentals are reflected in Treasury bond prices.”

Yields on 10-year notes were 3.12 percent when Gundlach made his prediction on June 23 during a speech at a Morningstar Inc. conference in Chicago. The yield touched a 19-month low of 2.4158 percent on Aug. 25. Ten-year note yields, which fell 5 basis points today to 2.48 percent, reached a record low of 2.04 percent on Dec. 18, 2008.

The notes’ prices tumbled the most since June 2009 on Aug. 27 after Federal Reserve Chairman Ben S. Bernanke said the central bank will provide additional stimulus as needed during opening remarks to central banks at a symposium in Jackson Hole, Wyoming. The two-year note yield touched a record low of 0.4542 percent on Aug. 24.

“This is a long-term bottoming process, which could very well take several weeks or even a few months more to play out,” Gundlach said in an interview. “We moved the proceeds from the Treasury sales into a mix of corporate bonds, including our first allocation to below investment grade corporate bonds since the launch of the Core Fixed Income Fund on June 1,” which invests in different sectors of the global fixed income markets. The fund is up 5 percent since its inception through Aug. 27, he said.

The five-year Treasury note yield touched a 20-month low on Aug. 25 of 1.2775 percent, just 9 basis points shy of its record low of 1.1852 percent, reached on Dec. 17, 2008.

An “underweight” position in Treasuries means that a firm owns a smaller percentage of the securities in its portfolios as is contained in benchmark indexes used to measure performance. “Overweight” means the firm owns a greater percentage.

Gundlach, 50, co-managed the TCW Total Return Bond Fund with Philip Barach. The fund gained an average of 7.5 percent annually in the five years ended Dec. 4, compared with 7 percent by the Total Return run by Bill Gross of Newport Beach, California-based Pacific Investment Management Co., the world’s largest bond fund at $239 billion.