High-yield investors beware. Junk bonds that were financed at low, fixed rates will eventually mature and, according to Jeffrey Gundlach, weak issuers that cannot refinance at higher rates will default.
Gundlach spoke to investors via a webcast, which he titled “Survivor,” and the focus was on his flagship total-return fund (DBLTX). Slides from that webcast are available here. Gundlach is the founder and chairman of Los Angeles-based DoubleLine Capital.
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High-yield defaults were delayed as bonds were financed at low, fixed rates, he said. During the Q&A portion of the webcast, Gundlach was asked how defaults will look at higher rates, once those bonds mature.
“The cycle has been delayed,” he said, “but if the economy is struggling with high rates and weak GDP growth, we will have the highest default rates of all time.”
Gundlach chose the title of his webcast because very few investors have survived the high rates and inflation of the 1970s. Indeed, he said, many have not survived the ultra-low rates prior to 2022.
That lack of experience among investors with a rising-rate environment fuels the danger in high-yield debt.
“We will see significant defaults in CCC loans,” Gundlach said. Those are floating-rate bonds, and interest rates on them have been ratcheting up as the Fed has raised rates.
Lending standards are going up, and defaults are just starting to rise. Portfolios should be upgraded in credit quality, he warned, and DoubleLine has done so over the last 18 months.
“Get out of high yield,” he said, “because spreads have not risen in response to equity market declines.”
Read the full article here by Robert Huebscher, Advisor Perspectives.
