Are Treasuries Set Up For A Short Scramble?

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 Realty Income (O) as a bond substitute with a high and growing yield.  This week, I’m going to recommend you pick up shares of one of Gundlach’s bond funds, the DoubleLine Opportunistic Credit Fund (DBL).  DBL traditionally sells at a premium to its net asset value.  Today, it sells at a slight discount.   It also happens to pay a nice 8.6% yield.

An 8.6% yield in a world of 2.5% 10-year Treasuries isn’t half bad.  And with the more speculative sectors of the stock market still showing weakness, rotating some of your funds out of equities and into an income play makes sense. 

ACTION TO TAKE

Buy DoubleLine Opportunistic Credit Fund (DBL) so long as it is trading at a discount to its NAV.  Plan to hold for at least the next 4-6 months.  If Gundlach is wrong—and bond yields start to creep up above 2.8% again—we’ll take that as a cue to sell.  

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Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor  and chief investment officer of the investment firm Sizemore Capital Management. Join Macro Trend Investor today and start profiting from the powerful megatrends that are cresting across the global economy—and get ahead of the next macro trend to build your wealth for years to come.  Just $1.00 grants you your all-access pass!