DoubleLine's Gundlach says U.S. high-yield credit could face crisis

[April 20, 2015]  NEW YORK (Reuters) - The U.S. high-yield credit market, which has benefited from massive flows in the last few years from investors looking for higher returns, could unravel in about two years after the Federal Reserve starts raising interest rates, DoubleLine Capital chief executive Jeffrey Gundlach said on Sunday.

"I think that's the next bond market crisis," Gundlach told TV program Wall Street Week.

Gundlach is widely followed on Wall Street because of his timely investment calls.

"One thing that is really important that nobody talks about or thinks about is that the entire life of the junk bond market has been secularly declining interest rates," the DoubleLine chief executive said.

Now that U.S. interest rates are expected to rise at least once this year, the entire high-yield market could be at risk of a dislocation, he said.

The concern is that liquidity could be a big problem because of Wall Street brokerages' reduced presence in the corporate bond market.

In the past, big banks could be counted on to make it easier to buy and sell bonds because of their sizable inventory. But new rules have made it more costly to hold such assets.

Once the Fed starts raising interest rates, Gundlach said there is a risk of a run on high-yield bond funds.

He added that the companies issuing debt at higher yields need to have strong cash flows to pay interest payments on their bonds.

Gundlach, however, said the potential crisis in the high-yield market will not happen over the next 18-24 months, so investors do not have to make radical changes. "Investors should be investing down in high-yield bonds over the next two years," he said.

Gundlach also warned about "highly valued" shopping mall REITs (real estate investment trusts) because of a "secular downward death spiral for malls."

He likewise cautioned against master limited partnerships (MLPs) which he described as "massively leveraged." If interest rates rise, MLP margins will collapse, Gundlach said.

MLPs, publicly traded partnerships that pass along most of their income to investors, have been a hot product among investors because they typically trade at higher yields averaging between 5-6 percent.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Cynthia Osterman)

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