Bond titan Jeffrey Gundlach isn't sure which way bond yields are headed, but he does see a good bet that they'll move a lot.
Speaking Monday at the Sohn Conference in New York, the head of DoubleLine Capital said his best suggestion is on volatility in long-term rates. Investors can express the bet through both put and call options at the same strike, or sale, price. Puts give investors the ability to sell, while calls provide the chance to buy.
Landing a number where the rate rises or falls more than the total premium on the option could allow investors to book big profits. Gundlach said 50% to 75% gains over the next 12 months wouldn't be out of line.
He recommended using the iShares 20+ Year Treasury Bond ETF as a way to execute the trade.
"I think this is an extremely compelling time to do this trade and an extremely important environment where outcomes are so binary," he said.
Gundlach runs the $50 billion DoubleLine Total Return Bond Fund.
The fund's five-year performance is among the best in its category, though it has lagged most of its peers in 2019 with a gain of just 2%, according to Morningstar rankings.
Gundlach talked at length about the Federal Reserve and Chairman Jerome Powell, whose fickle moves have made it difficult to know just where monetary policy will be ahead. Gundlach used the term "policy fluid" to describe the state of affairs under the central bank chief.
"The problem is that policy fluidity suggests pretty much anything can happen almost without notice," he said, pointing to several policy shifts from Powell since October 2018.
In addition to the monetary policy shifts, which now see little chance of a rate hike or cut this year, there are fiscal policy questions. Modern Monetary Theory, which posits that rates should be zero to allow the government to spend on programs that will fix the wealth cap, also is gaining popularity.
"Modern Monetary Theory is not a good idea," Gundlach said. "It's not modern, it's not monetary, and it isn't much of a theory."
At the 2018 Sohn conference, Gundlach recommended a long play on SPDR S&P Oil & Gas Exploration & Production ETF and a short on Facebook. Both trades turned out poorly. The explorer ETF has slumped more than 24% over the past year while Facebook, though underperforming the broader market, is still up more than 9%.
