Gundlach: Bonds On The Verge Of 'One Of The Biggest Short-Covering Scrambles Of All Time'

Includes: GOVT, PLW
by: Charles Lewis Sizemore, CFA

Here's a contrarian call if I've ever heard one. Jeffrey Gundlach, head of DoubleLine Capital, believes that we could be on the verge of "one of the biggest short-covering scrambles of all time."

So, to what asset class is Gundlach referring? Beaten-down social media stocks, perhaps?

Try Treasuries. The 10-year Treasury yield dipped below 2.5% intraday on Thursday. But if Gundlach is correct about the large short positions in Treasuries needing to be covered, we could see yields hit new all-time lows.

Back in January, when the Wall Street consensus was that yields were going north of 3.4%, Gundlach predicted that they would sink to as low as 2.5%. I made a similar forecast in January that the 10-year Treasury yield would top out at a little over 3% and then settle into a long trading range between about 2.2% and 3.2%.

So, if yields are going lower-or at the very least, staying in a trading range for the foreseeable future- how should we invest?

Earlier this month, I recommended a Dividend Growth strategy. I would reiterate that recommendation today. With inflation low, the new supply of Treasuries shrinking as the budget deficit shrinks, and with demographic forces (read "Baby Boomer retirement") keeping demand for income investments high, yields should stay low for years to come. A strategy of buying securities with a rising stream of income should perform well in this environment.

And one final point to consider: There is no better indicator of a company's health and of management confidence than raising the cash dividend. As a general rule, you will be lucky to pry cash out of a CEO's cold, dead hands. A willingness to distribute cash is an indication that management sees a lot more of it coming.