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DoubleLine's Gundlach on the 'Schizophrenic' Trading Market

Tuesday, 5 Jul 2011 | 4:18 PM ET

It may have been missed given the strong rally in equity prices last week, but certain asset classes within the credit markets had their own rally last week, and for some it was a big one.

The ABX index, which tracks the performance of different vintages of mortgage backed securities and is widely used as a barometer for so called subprime mortgages, was up an astounding 20 percent last week, while junk bonds also rallied sharply.

“I don’t think I’ve seen trading so schizophrenic in the trading market since late ’08,” said Jeffrey Gundlach, who runs the $12 billion fixed income firm Doubleline Capital.

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Gundlach, a guest on The Strategy Session Tuesday, has previously detailed the travails of subprime credit, which was having a decidedly poor year prior to the last two week’s huge rally.

A return to risk brought about by the Greek “save” coupled with the Bank of Americaputback settlement, conspired to bring the ABX index up sharply, but Gundlach also points out that an index that some fixed income traders had been using to hedge the ABX, the CMBX, also had a big move last week—and that was down.

“Traders on Wall Street are just wrung out like a towel”, said Gundlach in referring to the recent volatility.

The question, of course, is whether we’ll see some significant losses amongst the trading desks of investment banks and macro hedge funds as a result of all that volatility.


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