DoubleLine says S&P warning "good" for US debt

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By Jennifer Ablan
NEW YORK | Mon Apr 18, 2011 2:55pm EDT
(Reuters) - U.S. Treasury securities will perform well following Standard & Poor's downward revision of the credit outlook for the United States, DoubleLine Chief Executive Officer Jeffrey Gundlach said on Monday.

Gundlach said Treasuries will be in high demand with major holders, who include foreign investors, as the U.S. economy will "soften substantially" with no monetary stimulus in the pipeline.

The S&P warning, which cited a risk that policymakers may not reach agreement on a plan to slash the huge federal budget deficit, is "good for Treasuries and bad for the economy and stocks," Gundlach told Reuters.

"The foreign holders are well aware of the deficit facts. So are domestic investors," said Gundlach, who oversees $9.8 billion at the Los Angeles-based firm.

"If the deficit problem is actually beginning to be addressed, then the fundamentals for Treasuries will get better. Not only will supply be lower, but raising taxes and cutting spending both detract from economic growth, keeping inflation under control," he said.

S&P revised its outlook on the United States' AAA credit rating to negative from stable, citing the country's deteriorating fiscal position. The shift reflects the rating agency's belief that there is a one in three chance that the U.S. credit rating could be downgraded within two years.

Mohamed El-Erian, the co-chief investment officer at PIMCO, told Reuters Insider television that the S&P warning reflects the United States' deteriorating standing in the global economy.

"The U.S. risks losing their AAA rating under our internal ratings," El-Erian said. He added that the $1.2 trillion fund will continue to avoid long-term U.S. Treasuries, particularly at these "low" yield levels. Benchmark 10-year yields fell to 3.37 percent, marking the lowest since March 24.

But Gundlach argues that Treasuries will become increasingly attractive and yields lower as the U.S. could likely weaken in the months to come.

Gundlach said Treasuries have been under selling pressure during the Federal Reserve's purchases of $600 billion in long-term Treasuries, as part of a second round of quantitative easing, known as QE2 "because QE2 is an inflationary policy."

He also said ending the stimulus and addressing the deficit are the opposite of inflationary policies.

"So addressing the deficit means that low Treasury yields make sense," he added.

All told, the S&P warning "should serve as an effective cattle prod in pushing the politicians toward a program of spending cuts and tax increases."

Gundlach said last week on an investor conference call: "By now it's getting relatively close to June 30 and it's about time for the markets to start discounting the end of QE2 and a weaker economy."

(Reporting by Jennifer Ablan; Editing by Chizu Nomiyama )