Gundlach: Stocks or Bonds? The Choice Right Now Is Clear

he fixed income market is “very cheap” now compared to the stock market, offering solid returns and upside potential with limited downside risk, Jeffrey Gundlach said Wednesday.

“I think this is the time you want to have a barbell portfolio with some risk assets, primarily in bonds,” the CEO of DoubleLine Capital, a bond-focused investment firm, said on CNBC’s “Closing Bell.”

While Gundlach previously suggested a portfolio comprising 30% stocks, 60% bonds and 10% real assets — such as gold — he now recommends an allocation of 20% stocks, 60% bonds and 20% real assets, he said.

Investors can reach 5% returns in a “very high-grade bond portfolio” with no default risk, and 8% to 10% in a “well-positioned, actively managed fixed income portfolio” that takes the “middle part of the capital structure,” Gundlach said.

The billionaire investor said he’s sticking with a game plan that involves systematic upgrading in fixed income portfolios, adding that this is the “perfect time” to do so as the stock market has rebounded.

“You can get all these yields and you can have all this upside,” he said. At current valuations, bond investors could achieve greater upside than the stock market, and the downside can’t be worse, Gundlach said. The only possible pitfall would be a massive default problem, but if that occurs, stocks would fall more than 50%, he suggested.

Fixed income right now has four times the stock market’s payout, according to Gundlach, who suggested using long-term Treasurys as a hedge in the barbell investing strategy, which seeks to balance risk and returns by combining high- and low-risk assets.

He called the current environment an exciting time for fixed income risk parity, in which investors can get yields and “manage risk very precisely.”

Gundlach, speaking after the Federal Reserve announced for the first time in 15 months that it would not raise interest rates, also said he doesn’t expect the central bank to resume interest rate hikes.

They won’t be anywhere as readily available as those of corporates right? Since the likelihood of a corporate defaulting is much higher than that of a country

Yes, so long as there are banks willing to sell, one can buy. I say banks but if you have an ISDA you can participate in the OTC derivatives/swaps mkt. Now, can you participate as an individual investor? Likely not unfortunately.

Credit default swaps
Do fixed income securities of a country have a credit default swap?