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Junk Bonds are Cheap, But 'Too Early' to Buy: Gundlach

Tuesday, 4 Oct 2011 | 1:48 PM ET

Jeffrey Gundlach, CEO and CIO of the fixed-income investment management firm DoubleLine Capital, told CNBC Tuesday “junk bonds are actually cheap now. They’ve gone from the richest [valuation] in history to a massive underperformance versus government bonds.”

Jeffrey Gundlach
CNBC
Jeffrey Gundlach

“What you do is you compare the returns of one index versus the other, versus a sort of historical trend," said Gundlach, whose fund has $17 billion in assets. "We were two standard deviations rich on that basis in March or April, which is the worse ever. And now you’re actually one and a half standard deviation cheap."

But now is the tough part because the valuation is there but the technicals in the momentum are terrible, he added. "Because of that, it’s too early to buy."

“This thing is going to get a little bit cheaper, particularly as we move forward and rethink the earnings and default situation, which won’t be an eminent turnaround," explained Gundlach.

"But when you think about late 2012 or 2013, you’re going to be facing higher default rates and it’s just not that likely that you’re going to get a sustained rally in credit when defaults are about to move to the upside,” he went on to say. “So it’s a lot trickier now.”

The bond-fund manager was recently awarded $66.7 million by a jury over his messy divorce from investment firm Trust Company of the West after a high-profile trial that transfixed the investment world.

TCW, a unit of French bank Societe Generale, was awarded no damages in its claims against its former investment chief, although the jury found Gundlach did breach his fiduciary duty to the firm.

“What really matters in a civil trial is where the money flows, and $67 million my way and zero the other way. When it comes to the jury’s findings there’s a hearing coming up on Oct. 25 where we expect some favorable results. So in the end they will be mopped up in our favor as well.”

Gundlach also reflected back to last year when advisors recommended buying emerging markets in the local currencies and dividend-paying stocks.

“We hated [buying emerging makets in local currencies] at DoubleLine, and there’s just been a blood bath in that area in the past month," he said. "And ... what I don’t like about [dividend-paying stocks] is it disrespects the obvious mismatch in volatility.”

In terms of the "huge loss that is emanating out of Europe," Gundlach said, "all we can do as investors is make sure we’re not the ones taking the loss."

"Avoid Europe, avoid banks, no invests there at all," concluded Gundlach.

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