Gundlach: Junk bonds at all-time relative overvaluation levels


"The default rate is non-existent," he says, agreeing that fundamentals in high-yield look good. "Instead of a default cycle, we've had a refinance cycle." The issue, however, is valuation. At the end of 2013, the 30-year Treasury yielded about 4%, while BB corporates "unbelievably" yielded just 4.5% - a "remarkably low incremental yield."

His feelings about overvaluation extend to the investment grade corporate market (LQD) as well.

Most curious to Gundlach is how universally the long bond is hated at 4%, while junk yielding 4.5% gets so much love.

Besides Treasurys, Gundlach sees value in emerging market bonds. The risk is in the currency, but this can be eliminated by buying dollar-denominated paper.

High yield ETFs: HYG, JNK, HYLD, HYS, SJNK, PHB, BSJF, SJB, BSJE, HYHG, BSJG, BSJI, ANGL, BSJH, HYLS, XOVR, THHY, UJB, QLTC, SHYG, BSJK, HYZD, BSJJ, HYND

Investment grade ETFs: LQD, VCSH, VCIT, CORP, VCLT, CSJ, CIU, CFT, SCPB, LWC, CLY, ITR, QLTA, IGHG, PFIG, SLQD, IGS, CBND, IGU, QLTB

EM bond ETFs: EMB, PCY, ELD, EMLC, EMCB, VWOB, EMCD, ILB, HYEM, EMHY, LEMB, ITIP, EMAG, EBND, GTIP, PFEM, EMSH, SEMF, IEMF, LEMF

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Comments (3)
  • DeepValueLover
    , contributor
    Comments (10759) | Send Message
     
    ATM puts in JNK could be Deep Values depending on the expiration.
    12 Feb 2014, 05:21 PM Reply Like
  • John.Ferrara
    , contributor
    Comments (25) | Send Message
     
    I'm not getting back into JNK until I see 7-8% yields again. And there may be some default this year. Energy Future Holdings is filing for bankruptcy this year no word yet on what will happen with their bonds. I know JNK has a .37%-.45% weight.
    12 Feb 2014, 09:05 PM Reply Like
  • djoseph
    , contributor
    Comments (80) | Send Message
     
    The reason I prefer 4.5 for high yield as opposed to 3.75 for Treasuries is interest rate sensitivity. High yield has more equity like behavior and fall off with higher rates is less than for Treasuries. They are like a high dividend stock fund.
    14 Feb 2014, 11:16 AM Reply Like
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