Doubleline Gundlach: 'I Was Wrong' About U.S. Treasurys

Big bond fund manager Jeffrey Gundlach admitted he stumbled on his prognostications for the U.S. Treasury bond market, but he has withstood the months-long bond market carnage better than many of his rivals.

"I was wrong," said Mr. Gundlach, founder of investment firm DoubleLine Capital and co-manager of the $38.9 billion DoubleLine Total Return Bond Fund, in an interview with the Wall Street Journal on Tuesday afternoon. "I didn't anticipate the magnitude of the liquidation phase in the bond market. I have thought that the 10-year yield should be below 2.5%."

Mr. Gundlach's comments come ahead of a webcast he plans to hold on the company's Web site at 4:15 p.m., which is open to the public. He is among several managers of some of the world's largest bond funds taking steps to reassure investors and explain their bets amid the broad bond market selloff.

"I am doing a webcast to help investors make sense of what has been happening the last few weeks," said Mr. Gundlach in an email Wednesday night responding to questions. "Relative value favored Treasurys before this sell-off. That's why Treasurys have out-performed. Now relative value favors asset classes other than Treasurys."

Bill Gross, known as "the bond king," who manages $285.2 billion Total Return Bond Fund at Pacific Investment Management Co., told investors in an outlook note late Wednesday: "Don't jump ship now."

Mr. Gundlach, declared on June 4 during a webcast that the benchmark 10-year Treasury yield wouldn't rise beyond 2.35%. Instead, investors extended their selling of Treasurys that began in May sending the 10-year yield to a 22-month high of 2.667% during Monday's trading, from about 2.15% on June 4. Bond prices fall when their yields rise.

In the interview Tuesday, he changed his tune. He said the 10-year yield, trading at 2.515% on Thursday, may peak at 2.75% and the move higher probably would come in July. Bond yields would come back down at the end of the year, he said, but he declined to provide a longer-term forecast. Earlier in June he had bet that the yield would drop to 1.7% by the end of this year.

"I am wrong 30% of the time and right 70% of the time and this was one that was wrong," said Mr. Gundlach.

Mr. Gundlach's revised stance is a stark example of how bond investors were caught off guard by the massive selloff in the fixed income markets over the past two weeks, driven by the Federal Reserve's comments about dialing back its bond buying program. The Fed's stimulus has helped boost the economy and the financial markets by keeping interest rates low.

The 10-year Treasury yield has soared nearly one percentage point since the start of May. Other assets have tumbled even more than Treasury bonds, including corporate debt, mortgage-backed securities, emerging market stocks and bonds.

Mr. Gundlach said on Tuesday he has bought mortgage bonds comprised of government backed loans in recent days and that dollar-denominated emerging-market corporate bonds are another asset class he likes in current environment.

Mr. Gundlach's fund, heavily invested in mortgage-backed securities, posted a loss of 1.77% in June through Wednesday, according to fund tracker Lipper. It still outperformed 52% of its rivals out of 33 U.S. mortgage bond funds tracked by Lipper.

The fund has fared much better than the loss of 2.03% on its benchmark--Barclays US Aggregate Bond Index, and the loss of 3.19% from Mr. Gross's bond fund, according to Lipper.

Last month, investors warmed up to Mr. Gundlach's fund which attracted a $293 million net inflow in May, contrasting with a $1.3 billion outflow from Pimco's Total Return Fund, according to Morningstar.

Since it was launched in April 2010, the DoubleLine fund has lured $37.1 billion new cash through May, one of the fastest-grown bond funds in the industry.

Mr. Gross is founder and co-chief investment officer at Pimco, a unit of Allianz SE (AZSEY) and his bond fund, which also benchmarks against Barclays US Aggregate Bond Index, is the world's biggest bond fund in size.

This year through Wednesday, Mr. Gundlach's fund was down 0.38%, beating 91% of U.S. mortgage bond funds category tracked by Lipper. The return compared to 2.92% loss from the benchmark and 3.58% from Mr. Gross's fund, according to Lipper.

One reason Mr. Gundlach's fund has withstood the market carnage better than Mr. Gross's fund is due to its lower exposure to the risk of rising interest rates by having more of its money invested in assets that mature in a shorter time frame.

When interest rates are rising, existing bonds that mature in years farther out fall more in value. When prices fall yields rise.

Mr. Gundlach's fund had an effective duration of 2.49 years at the end of May, according to Morningstar. Mr. Gross's fund had a bigger duration of 5.15 years, according to data from Pimco's website, making it more vulnerable to sharp rise in yields.

Mr. Gundlach's fund heavily concentrated on mortgage securities, accounting for 76.6% of the fund's holdings at the end of May, while the share of Treasury holdings were 4.76%, according to data from fund tracker Morningstar. In contrast, Mr. Gross's bond fund held 37% in Treasury bonds including inflation-protected securities and 34% in mortgage-backed securities, according to data from Pimco's website.

Mortgage-backed securities have posted a loss of 1.6% in June through Wednesday on total return basis, compared to a loss of 1.41% on Treasury bonds, according to data from Barclays.

"People don't like negative return obviously but when you have negative returns in every category of bond funds it is not difficult to tell your clients because you are preserving capital better than many other funds," said Mr. Gundlach.

Write to Min Zeng at [e-mail]

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