Gundlach on the Biggest Risk Facing Bond Investors and the Likely Next President

On December 11 at 5:22pm ET, this article was corrected. In the following paragraph, the next-to-last word was changed from "lower" to "higher": "Gundlach thinks the deficit will go to 13% of GDP in the next recession. That is why, he said, there will be a greater supply of bonds and higher yields."

Fear among bond investors is focused on rising rates, but Jeffrey Gundlach says you should worry about something more sinister. In his webcast yesterday, he also offered his updated 2020 presidential election prediction.

Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke via a webcast with investors on December 10. His talk was titled, “A Rolling Loan Gathers No Moss,” and the focus was on his firm’s flagship mutual fund, the DoubleLine Total Return Fund (DBLTX). The slides from his presentation are available here.

His talk’s title is a play on the phrase, “A rolling stone gathers no moss.” Gundlach said his title was originally coined by the hedge fund investor, Kyle Bass, to signify that investors will continue to be paid on the bonds they own as long as issuers can keep rolling over their debt.

The credit worthiness of corporate debt is the number one risk that should concern bond investors. Gundlach issued his strongest warnings ever over the leverage taken on by U.S. corporations and the unrealistically favorable ratings that debt has been given.

Based on Morgan Stanley research, he said that 39% of the bond universe should be rated “junk” and 10% of it rated single-B or lower.

“There is a lot of potential for downgrades,” he said, which would be amplified if foreigners start selling the debt they own and the dollar weakens.

“This is the biggest risk facing bond investors,” Gundlach said.