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Gundlach: Expect More Downside on Credit Spreads

DoubleLine CEO, CIO, and portfolio manager Jeffrey Gundlach says the covenants protecting investors have eroded very quickly in recent bond issuances, which will sow the seeds for bigger default problems and weaker performance in the future.

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Jason Stipp: Moving to a conversation that you had with Morningstar last fall, you mentioned, at that time, given the run ups that we'd seen in the market, that credit risk looked very overpriced at that point. You said that there was something like a 50% run-up with hardly any change in fundamentals. Given that we have seen some repricing of risk recently, how are valuations looking for credit risk now? Is is more attractive now? Or are things maybe just getting back to a more reasonable level?

Jeffrey Gundlach: Well, they certainly have gotten cheaper. There's been a really bloody sell-off, here in the month of May, in the below-investment-grade corporate bond market, basically erasing all of the incremental performance. Treasury bonds actually, year to date, have outperformed non-investment-grade government bonds, thanks to that sell-off. Actually, in the first quarter, the fundamentals underneath the corporate economy were surprising on the upside, and there was a lot of talk about that, and that is what has propelled the S&P 500 to briefly go above 1,200.

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