Investors should add longer-duration government bonds to their portfolio if they believe the Federal Reserve will begin its tightening cycle in December, Jeffrey Gundlach, chief executive of DoubleLine Capital, said on a webcast Monday.
Gundlach said he believes an interest rate increase in December would be a policy mistake, given slowing global growth, lack of inflationary pressures and selling pressure in risky high-yield "junk" bonds and emerging-market securities.
Gundlach, whose DoubleLine oversees $80 billion in assets, added that the U.S. economy and risk markets cannot digest a premature Fed hike. Raising rates too early would hurt high-yield "junk" bonds and help longer-duration government bonds such as U.S. Treasurys and government-guaranteed bonds such as mortgage-backed securities (MBS).
Gundlach said he would rather own cash than short-maturity bonds because short-term fixed-income securities yield almost nothing. If investors are willing to accept no yield, it would be better to hold cash and forgo the risk for virtually zero yield with short-term bonds, he said.
Gundlach said he was surprised about the dollar's strength after the Fed kept interest rates unchanged at near zero on Thursday, in a bow to worries about the global economy, financial market volatility and sluggish inflation at home.
He said he was "disappointed" that junk bonds have come under selling pressure after the U.S. central bank kept interest rates unchanged, adding "Perhaps investors are getting nervous because the price action is so bad."
Gundlach said it was Fed chair Janet Yellen's news conference that was "a little bit of a debacle." He said she injected confusion and uncertainty into financial markets and Fed policy makers "kind of no longer have a framework" to work with.
Many investors and economists have said the Fed's models have not done a great job of predicting economic developments, and understandably so given all the structural changes in the U.S. and abroad.
"If (policy makers) had raised rates on Thursday, traders and investors would be talking about the next one this week," Gundlach said after the webcast.
Overall, Gundlach said: "I'm not worried about bond market liquidity."