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How to Play Treasuries in Response to U.S. Deficit and Deflation Fears

Jeffrey Gundlach says the U.S.’s enormous debt load spells deflationary pressures for some time to come. That’s why he likes Treasuries.

The bad news is that the U.S. has an unsustainable debt load. The good news is investors still have options.

These were the two main takeaways from Jeffrey Gundlach’s keynote address June 23 at Morningstar’s annual investment conference in Chicago. Gundlach formerly managed some $70 billion for TCW, but recently founded his own bond shop, DoubleLine Capital, after an acrimonious parting with TCW.

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For all the money the government has pumped into the system since the start of the financial crisis, he says, deflation remains a far more imminent threat than inflation. “The problem with the argument for runaway inflation is that it doesn’t relate to current conditions,” he says. In the hyperinflationary environment of post-World War I Germany, he says, “the money supply was zooming, commodity prices were zooming, and people were trying to get rid of money as fast as they could. None of this is happening today.”

Despite their low yields, he likes long-term Treasuries as a hedge against deflation, but adds that buyers must keep a vigilant watch over investor attitudes. The investment world’s opinion of Greece’s creditworthiness changed virtually overnight, he says, and if investors begin to exhibit a similar change in attitude toward U.S. debt, “you must sell it all, immediately.”

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In a presentation filled with eye-popping charts showing the dangers of America’s growing debt burden, Gundlach hammered home a point echoed by other speakers and attendees at the Morningstar conference: Huge deficits as far as the eye can see have major implications for your investments.

He says the U.S. has three bad options for dealing with its huge debt load: It can raise taxes, print money or renege on some of its obligations, particularly with respect to entitlements such as Social Security. He thinks it likely that policymakers will utilize all three options.

Gundlach is also finding double-digit yields in certain mortgage securities that the market has left for dead. In addition to boosting yield, he considers these securities a hedge against the possibility of a surge in inflation (if inflation picks up, homeowners would be better able to make their monthly payments).

You can get access to Gundlach’s expertise in DoubleLine Total Return Bond Fund (symbol DLTNX), which has gathered nearly $1 billion in assets in its first two and a half months of existence. It requires a $2,000 minimum investment and charges 0.74% in annual expenses.

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