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UPDATE 2-Gundlach warns U.S. low-risk financial environment could change
June 13, 2017 / 9:48 PM / in 6 months

UPDATE 2-Gundlach warns U.S. low-risk financial environment could change

(New throughout, adds comments on volatility)

By Jennifer Ablan

NEW YORK, June 13 (Reuters) - The lengthy low-risk, low-volatility U.S. financial environment should not be viewed as a “new paradigm,” influential bond investor Jeffrey Gundlach said on a webcast on Tuesday.

Wall Street gained on Tuesday, with the S&P 500, Dow industrials and Russell 2000 setting record closing highs, as technology stocks bounced back and investors positioned ahead of an expected Federal Reserve interest rate hike.

Against that backdrop of soaring stock markets, the CBOE Volatility Index, also known as the VIX Index or the “fear gauge” for U.S. stocks, has been dropping.

Friday, the index plunged to 9.37, its lowest since Dec. 27, 1993. ”We’re on increasing watch for volatility,“ Gundlach said, pointing out that ”there is a massive amount of money that is being short VIX.

“It’s a trade that’s made a lot of money and it’s very very crowded, which suggests to me the days of low volatility are numbered,” he said. We “probably won’t see it continue through year end.”

Gundlach, who runs more than $105 billion at Los Angeles-based DoubleLine Capital, said investors should rotate out of U.S. stocks and into European equities, and also avoid U.S. Treasuries as he sees rates moving higher during the second half of the year.

“I strongly urge investors to peel a portion of their S&P holdings and move into Europe,” Gundlach said.

Gundlach said he expects the yield on the 10-year Treasury note, which stood around 2.21 percent on Tuesday, to move higher during the latter half of 2017. However, he does not expect it to hit 3 percent. Gundlach said the relative value between U.S. Treasuries and lower-yielding overseas government bonds are keeping U.S. yields in a tight range.

All told, short-term investors should brace for a rocky summer, Gundlach said.

“If you’re a trader or a speculator, I think you should be raising cash today literally today. If you’re an investor you can easily sit through a seasonally weak period,” Gundlach said. (Reporting By Jennifer Ablan; Editing by David Gregorio)

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