'Bond King' Jeffrey Gundlach says buy long-dated Treasurys, with prices set to rebound going into a recession

• Jeffrey Gundlach says long-duration Treasurys will make a good short-term trade in a recession.
• He expects a downturn to hit in the first half of 2024, which will push bond prices back up.
• Gundlach also sees agency mortgage securities and commercial mortgage bonds as attractive.

Investors should consider buying long-dated Treasurys as a brewing cocktail of economic factors could soon spark a rebound in the price of the bonds, according to DoubleLine Capital founder Jeffrey Gundlach.

"We like long-term treasury bonds for the short-term trade going into a recession. The 30-year US treasury yield downtrend of the past four decades has completely reversed, skyrocketing nearly 400bps in under two years," the "bond king" wrote in a Wednesday note. "There has been about a 50% drawdown in the long bond, which means there is now potential for the long bond to go up in price."

Gundlach's recession predictions come from the Leading Economic Index, which has long been pointing to a coming downturn. Meanwhile, the unemployment rate is set to cross above its 12-month moving average, which Gundlach noted usually points to a slowdown on the horizon.

In Gundlach's view, one reason long-dated bond yields have jumped to 5% levels is the massive deluge of Treasury issuance, caused by the deferral of 2022 tax payments. But this—along with pandemic stimulus and loan payment moratoriums-is set to end.

"With debt and tax holidays ending, consumers will have to ramp down their lifestyles. This could be a positive for the bond market because we will not have so much net supply and perhaps a negative economic consequence that could potentially lead to a bond rally in the next six months or so," Gundlach wrote.

In calling a recession on the horizon, he also touted agency mortgage-backed securities and commercial mortgage bonds as attractive investments.

Previously originated mortgages come with low refinancing risk, given today's high rates. The asset class is also cheaper than corporate bonds on a valuation basis, while offering the highest spreads in years.

In CMBS, while many have warned about a coming commercial real estate crash, Gundlach says investors should simply stick to AAA commercial mortgage bonds, which are offering higher credit ratings and better spreads than investment grade corporate debt.