The Case for Buying Treasuries
Jeffrey Gundlach, manager of DoubleLine Total Return, believes interest rates could stay low for years to come, making government bonds a safe bet.
Most bond investors today are preoccupied by the issue of when interest rates will rise and by how much. Jeffrey Gundlach says those investors are looking at it all wrong. "The question isn't, 'What am I going to do with my investments today because I'm worried that the Fed is going to stop this policy of low interest rates?'" says Gundlach, who manages DoubleLine Total Return Bond Fund (symbol DLTNX), a member of the Kiplinger 25. "The question is, 'What should I do with my investments today, understanding that the Fed is not going to stop this policy?'"
Gundlach says that if investors read between the lines of published minutes from Federal Reserve meetings, they'll see that the Fed has essentially declared that it sees no risks to current low-rate policies and intends to continue with these policies for the foreseeable future. The central bank is currently holding down interest rates in two ways: by keeping short-term interest rates near zero through its targeting of the federal funds rate (the rate at which banks lend money to one another overnight) and by buying $85 billion in long-term Treasuries and mortgage-backed bonds each month. The yield on the benchmark ten-year Treasury hit an all-time closing low of 1.40% in July 2012 and stood at 1.93% as of March 22.
Because of the Fed's manipulation of rates, Gundlach says, there is little risk in holding Treasuries today. "There's a floor on the price of bonds," due to the support of the central bank, he says. "Risk and volatility in government bonds have never been lower." And, he says, that won't change until the Fed starts to see a downside to its actions. Moreover, Gundlach says, given the size of the U.S. national debt, the U.S. government can't really afford to allow rates to move higher because that would add substantially to the nation's debt service. (Kiplinger's sees the yield of the ten-year Treasury note creeping up to 2.25% by the end of 2013.)
Although Gundlach has been purchasing Treasuries recently — he says he's bought more ten-year Treasuries this year than he has in any of the past four to five years — his total allocation to the bonds is still low. The fund held 5.1% of assets in government debt at the end of February. It had 45% in mortgage debt that's guaranteed by government agencies, such as Freddie Mac and the Government National Mortgage Association (because of their explicit government guarantee, these bonds tend to move in sync with Treasuries). It also held 28% in residential mortgage debt with no such guarantee, and 17% in cash.
From its inception in April 2010 through March 22, the fund returned 12.0% annualized, compared with an average return of 6.4% year for funds that invest in taxable, medium-maturity bonds.
It's particularly important for investors to hold some Treasuries, Gundlach says, because unlike most of investors' other holdings, Treasuries don't move in the same direction as stocks. Corporate bonds tend to fall with stocks when economic woes are increasing, he says, while Treasuries do not. "What went up in 2008?" he asks. "Government bonds, and that's about it."