In recent weeks, the man I now regard as the one-and-only “Bond King,” Jeffrey Gundlach (sorry Bill Gross), has been buying Treasuries, reversing his previous bearish stance on U.S. government debt. In an interview with Reuters, he said, “I bought more long-term Treasuries in the last month than I’ve bought in four years. I am a fan of Treasuries now.” The article implies that Gundlach purchased the 10-year Treasury when it recently crept above 2%.
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Given his other notable investment ideas over the past year, perhaps I should be calling Gundlach the “King of Investing,” rather than simply the “Bond King.” Who can forget his short Apple, long natural gas trade? And thus far, his short the Japanese yen, long Japanese stocks idea has been quite successful. But for the purposes of this article, let’s focus on his recent revelation that he has been buying Treasuries.
Treasuries, especially intermediate- to long-term, are perhaps the single most hated investment I know of. It is pretty rare to find someone who will openly express a bullish stance on Treasuries (besides the always-bullish-of-Treasuries Gary Shilling). How many people do you know who are long an intermediate- to long-term Treasury fund or individual Treasuries? I would guess not many, if any. So why is Jeffrey Gundlach a “fan” of Treasuries at this time? There are a couple of reasons.
First, the aforementioned Reuters article quotes Gundlach as saying, “They looked cheap at a yield above 2 percent, compared to certain riskier assets, which had gone up in price over the last six months while Treasury prices fell.” He continued, “Also, owning 10-year Treasuries at yields above 2 percent provides an offset to credit risk we are taking elsewhere in the portfolio.” In other words, Gundlach is implying that spreads are too narrow and yields are too low (relative to credit risk) to put new money to work in whichever part of the non-Treasury fixed income world he is already invested. I agree. Thus far, 2013 has proved to be quite a challenge when searching for a sufficient quantity of bonds that suit my credit risk and yield requirements.
Second, the article quotes Gundlach as saying, “It’s pretty clear that the Bank of Japan, Bank of England, the ECB and the Federal Reserve have expanded their balance sheets by approximately 3.5 percent of GDP per year for the last four years – and if it weren’t for that, you’d have negative GDP.” This quote nicely summarizes the great battle currently ongoing in the world’s financial system—that of strong underlying deflationary forces being met by money printing. Despite unprecedented amounts of (electronic) money printing, central banks have yet to realize that structural deflationary trends will not change as a result of money printing. If a country prints enough money, it is possible to postpone the eventual victory of strong underlying deflationary forces. But as far as I am aware, throughout history, that postponement has always ended in the eventual collapse of the then current monetary system (inherently deflationary as the currency goes to zero). With that in mind, it appears Gundlach is comfortable enough with the following fact to buy Treasuries: The Fed is not yet printing enough money to cause hyperinflation in the United States, and the structural changes necessary to allow the U.S. economy to stand on its own two feet (without the direct and indirect benefits that come from ultra-easy monetary policy) are nowhere in sight.
Before concluding, let me note one thing of relevance about the Japanese government’s recent strong talk of defeating deflation. Despite a whatever-it-takes type of monetary policy to rid the nation of deflation, Japanese 10- and 30-year bond yields are sitting right around 52-week lows. The 10-year was recently trading at a measly 62 basis points (0.62%) while the 30-year recently sat at 1.67%. The Japanese 30-year bond was just at 2% a month ago.
For those investors who think the U.S. government’s bonds will plunge in value (rise in yield) at any point in the coming years, keep in mind what is going on in Japan. Despite the nominee to become the next Bank of Japan governor stating he is prepared to do “whatever it takes” to beat deflation, bond yields are not soaring. In fact, given the recent performance of the Japanese long-bond, one could say bond yields are plunging. Why is this happening? Perhaps the markets don’t believe the “whatever it takes” stance. Or perhaps the markets realize that “whatever it takes” will involve a lot of money printing—and much of that money will be used to prop up the bond market.
Absent a tightening cycle from the Fed, investors looking to short Treasuries over the coming years because they believe money printing will lead to significantly higher rates should consider the current experience in Japan. A central bank hoping for some inflation, willing to print large sums of money, and willing to use that money to buy its country’s bonds can handle whatever onslaught of selling the market wants to throw at it. There are likely other ways to profit from money printing gone wild and an untenable debt situation. In today’s day-and-age, however, shorting the bonds of a country, when that country’s central bank is actively buying those bonds with money it has printed, seems like a bad use of time and energy. Perhaps it will one day work. If it does, I suspect it will happen in Japan before it occurs in the United States. But for the foreseeable future, seasonal sell-offs in Treasuries may offer opportunities for people like Gundlach to get long U.S. government bonds for a trade. He appears to be confident that we were recently in the midst of such an opportunity.
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