Fund manager: Now's the time to buy bonds

May 6, 2013: 7:23 AM ET
bonds oneyear
Yields are near record lows, but DoubleLine founder Jeffrey Gundlach says they may go even lower. Click chart for more on bonds.
Carlsbad, Calif. (CNNMoney)

With Treasury yields near record lows, one contrarian fund manager says now is the time to buy.

While investors around the world are voraciously hunting for higher returns than the 1.7% currently offered by 10-year Treasury notes, that's a misguided approach, said Jeffrey Gundlach, founder of investment fund DoubleLine Capital.

He acknowledged that "bond yields are painfully low," but said there are plenty of reasons for those yields to move even lower.

Speaking at the Altegris Global Conference last week, Gundlach said he's convinced the Fed won't raise rates or end its bond buying program, known as quantitative easing or QE, anytime soon. (Federal Reserve sticks with stimulus)

By buying bonds, the Fed's stimulus moves push up U.S. Treasury prices, which in turn depresses yields.

Bernanke has said that he sees no negative consequences from the Fed's actions, so worrying about the end of it is a waste of time, Gundlach said.

"Let's face it, QE travels right through the central heart of the U.S. bond market," Gundlach said. Last week, the Fed said it would continue buying $85 billion a month in mortgage-backed securities and Treasuries.

Related: Waiting for the bond bubble to pop

Buying up Treasuries probably won't make investors rich, Gundlach admitted, but in a world fraught with investment risk, it's still a relatively safe place to find steady returns over the long-term.

Even if investors opt to just keep their cash in banks right now, there are no guarantees they'll remain safe. Just look at Cyprus, he said.

Beyond Treasuries, Gundlach thinks corporate bonds could be interesting too, but investors should avoid bond index funds.

He reminded investors that General Motors (GM) and Ford (F) made up a large portion of investment grade index bond funds ahead of the financial crisis. Investors in those funds who thought they were taking on minimal risk experienced steep losses in 2008 and 2009.

How low could bond yields go considering 10-year Treasury yields are already hovering below 2%?

"I'm starting to think that all bond yields will converge down to 1%, if central banks truly are going to do whatever it takes," Gundlach said.

If Gundlach is right, and yields move even lower, investors who buy now, could still net a nice profit.

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