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Monday, May 12, 2014 10:50 PM


"Treasuries Can't Lose"


Whenever I hear 0% or 100% I start to question things. Certainly, the odds that the moon crashes into the earth tomorrow is as close to 0% as one can get, but what about the notion "Treasuries Can't Lose"?

I am a long-term treasury bull right now. But I would never suggest they cannot lose. However, Jeffrey Gundlach, co-founder and chief executive officer of DoubleLine Capital LP, is willing to state just that.

Please consider In Gundlach’s ‘No Normal’ World, Treasuries Can’t Lose

Jeffrey Gundlach, the star fixed-income manager whose mutual fund beat 97 percent of its rivals the past three years, has a simpler explanation for why investors have gotten the bond market so wrong this year: the aging of America.

More retirees mean a shrinking workforce, leading to less spending, slower inflation and greater demand for low-risk, income-producing investments. RBC Capital Markets, one of the 22 dealers obligated to bid at U.S. Treasury auctions, says annual growth in the working age population will slow to 0.2 percent in the coming decade from 1.2 percent in the 10 years before the financial crisis. This helps explain why the best and brightest erred in calling for a bear market in U.S. bonds -- and why benchmark Treasury yields may stay low for years to come, according to Gundlach.

“That’s one of the reasons why yields are not just going to explode on the upside,” Gundlach, who oversees $50 billion as the co-founder and chief executive officer of DoubleLine Capital LP, said in a May 7 interview with Tom Keene from Bloomberg’s headquarters in New York. “Part of this equation is the demand for income from the growing number of retirees.”

“Household income is being challenged at the paycheck-level, but increasing at the demographic level because of a great bulge of baby boomers retiring,” the 54-year-old money manager said. “Those that are working have to work that much harder to have GDP stay at the same level.”

The number of Americans 65 years old or more will balloon by 14.5 million this decade, the biggest increase versus the total population going back to 1900, according to data compiled by the Census Bureau. The ranks of the elderly will double over the first three decades of this century to 72 million and equal almost 20 percent of the population.

Older Americans will also buy more Treasuries for steady, low-risk income, said Gundlach, who was named “Money Manager of the Year” by Institutional Investor magazine for 2013.
I am sympathetic to the arguments presented by Gundlach. I even made similar arguments at Wine Country Conference (videos will be available shortly).

However, it is a huge mistake to suggest something is 0% or 100%. No one knows for certain what the Fed will do, how the US economy will react, or how the global economy will react.

Treasuries can lose here, and they might, even though my bet is with Gundlach. Moreover, analysis should not stop there. For example, 5-year treasuries may lose money even if 30-year treasuries gain.

I like treasuries here, especially long-duration, but it is hugely wrong to make statements "treasuries cannot lose".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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