TCW CIO Jeffrey Gundlach says default rates and building delinquencies argue for continued caution in mortgages, but they still look attractive on a risk-adjusted basis.
Lawrence Jones: Hi, I'm Lawrence Jones, senior mutual fund analyst with Morningstar, and I have the pleasure of speaking to Jeffrey Gundlach today, who is manager of TGLMX, the TCW Total Return Bond Fund, and CIO of the firm TCW.
Thanks for joining me, Jeffrey.
Jeffrey Gundlach: Thanks, Larry.
Jones: The first thing I'm hoping you can inform our viewers about today is your view on the current place of the mortgage markets, which is obviously where your fund plays primarily.
Can you talk a little about where you see the mortgage markets going at the end of '09 here and the beginning of 2010?
Gundlach: I think, contrary to popular belief, the trends of the mortgage market haven't really improved, in terms of default rates, in terms of building delinquencies. And so there's certain variables that would argue for caution.
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However, the mortgage market still remains, I think, on a risk-adjusted basis, more attractive than, say, corporate credit and now I would say after the rally other financial assets like equities.
One of the reasons for that is the problem in the mortgage market was so bad in terms of so many securities for sale and not the wherewithal of investors to buy them, because of downgrades, because of all the volume that was being forced to liquidate out, that the market got priced to kind of a book-end of conservatism. And it's kind of been frozen at that relative analysis still to this day.
One of the things I like to point out is that corporate credit, even CMBS, are always priced to an assumption of a par payback. When people quote yields on corporate bonds, it's always to this Nirvana case that's actually unlikely to happen. In fact, it isn't ever going to happen that you have no defaults.
Yet because of the technical problem, the mortgage market on the credit side was priced to almost a book-end of defaults, and remains priced to a book-end of defaults. And some of the variables underneath the non-agency market have gotten better, or stopped deteriorating. Like recovery rates have stabilized and gotten a little better. That's a good thing.
So there's some positives there. And in the agency mortgage market, the government remains committed to supporting the market. Whether you think that's a good long-term policy or not, the fact remains that their support has kept relative stability and decent performance all the way through the credit crisis from the very significantly-sized agency market.
So that together with the non-agencies as a mix in a portfolio seems to still be a really attractive place through the end of '09.
