DoubleLine’s Post

Transcript

Alright, let's turn now to fixed income. It has been a rollercoaster week with the 10 year yield looking to rebound after falling Monday to its lowest level in more than a year. So where should you be fighting value right now? And with more key inflation data on deck for next week is more volatility ahead for bonds? Let's bring in double line capital Deputy CIO Jeffrey Sherman. Jeff, it's great to have you on. I mean, just what's your initial big picture take on this massive repricing we've seen in the Treasury market, obviously? Responding to disinflation, growth fears, and then a reassessment of what the Fed's gonna do. Yeah, I think you nailed it all, Mike. And if you think about what happened on Friday, it was really a mixed report. You had this job growth, albeit below the trend line we've seen, but the 114,000 jobs created in the in the establishment survey. But then if you go to the household survey, we saw the unemployment rate surge and a little bit of was rounding, it was like a 4.25. So it round to 4.3 but on the unemployment rate. But effectively what you have is a nervous market. And you've had in bond investors for really the last nine to 10 months, really just listening to Jay Powell, that when November last year when he pivoted to say the hiking cycle was done, the bond market has been encouraging rate cuts. And so if you think back to January this year, there was 175 basis points or 725 basis point cuts priced into the market. Obviously, that hasn't materialized to date. There's only been 0. And so I think what you see in this report and if you listen to what Jay Powell said last week. They're looking to cut. And so from the standpoint of what happened on Friday, it looks like there's just a lot of excesses out there. There's been complacency. Doesn't matter if you talk about spreads, you talk about equity valuations. And all of a sudden people got extremely nervous in this report. And that nervousness just kind of fed through bled through the weekend. We saw the the Japanese overnight market on Sunday really sell off meaningfully. We woke up to it on Monday and there was really a continued pull through on this. But all of a sudden at 7:00 AM. Specific or 10:10 AM on the East Coast. What happened was we got the ISM service data and knowing services is a big piece of the economy. We had a decent report out of there. There was expansion, there was job growth in that. Unfortunately there was some higher prices paid. So ultimately what you saw is stability come back to that market. And I would argue that started to to have some cooler heads prevail. Now does that mean that we're through the woods yet? It absolutely not. But for the inflation report next week, we don't expect to see a spike in it. We expect to see at ease a little bit. So this puts the Fed. To play and that's why the bond market is pricing in cuts really at the next few meetings. So then I think the question is, Jeffrey, is how big of a rate cut could we see in September? I look back to comments made by Fed Chair Jerome Powell at the last policy meeting. He said a a rate cut is on the table for September, but that 50 basis points was unlikely. Their economists were expecting 100 basis point rate cut in September. What do you think? Yeah, definitely not 100. We're not in the 100 camp. I I think the 50 albeit price today. So if you look at the forward curve and you look at kind of SOFR futures, your dollar strips, what you'll find is that you, you have a little bit more than 50 priced in today. I think the 50s a coin flip at this point. I do think they cut, I think they want to signal the cut, but I think the guidance you're gonna get SEMA is coming is gonna come out of Jackson Hole in the 23rd. This is a, this is kind of been in place since Bernanke did it to kind of talk about Operation Twist almost. A decade ago and so Jacksonville, I think it's gonna give us some guidance on where they are. And so I think it's a coin flip today on whether it's 50 or 25. So I do, I am in the camp that they are gonna cut every meeting in the rest of the year as it's 75 cumulative is 100 cumulative. I think it's going to be once again data dependent. And I don't think the economy fell out of bed just because the jobs report. If you look back over the last two months, the economic data has been weakening, but weakening just augers for us having not such a tight policy rate. And so is it a soft landing? Is it a hard landing? I'm calling it kind of a firm landing at this point. And I think the Fed is going to deliver cuts, but I, I'm just not sure that it's exactly as aggressive as the bond market has repriced in the last few days. And that's what you're seeing, you know, since that service data came out on Monday and then the pool through yesterday and today, you're kind of seeing more stability and in all markets. And so I, I think it's just people were, it's a knee jerk reaction. There was some leverage unwind in the system and that's what drove the momentum in all markets. Where does that leave you in terms of, you know, where you put the incremental dollar in the bond market, Jeff? I mean, in terms of, you know, spreads on the corporate side, they widened out a little bit. I guess in the grand scheme of things, not so much. But is there value being generated or you feel like treasuries are just kind of overshot in terms of pricing and cuts? Like if you wanna get cute and, and we don't recommend investors get cute, that's what our traders do once in a while, maybe you wanna peel a little bit of the Treasury position off and just wait for a little bit of backup. But if we get it back up of another 20-30 basis points anywhere across the curb, I do think it's a buying opportunity because again, inflation is coming down. And so even though you're gonna have policy rates that are likely to come down as well, it allows you to essentially get real yield. And I heard your previous guest talking about income, You get it from that part of the portfolio. But also, you know, I think some of that trades gone in like the high yield said, I mean we we widen like 80 basis points over about four days going through Monday. If you were a tactical and able to get a little bit done there, that's great. But also there's opportunities in other parts of the credit market there are often overlooked. And Mike, you know, I come on the show, we talk a lot about like securities and like commercial real estate and things like that. That's a part that we like is a very tactical trade over the next four to six months. There's been spread widening there. We think it's a very good opportunity. Right now, so I do think people need to rethink the cash. We're looking at this idea that the Fed is going to bring policy rates down. And so I think owning some, you know, every marginal dollar of credit you wanna buy, I think should be augmented with some of this risk off trade. And also there's one other market, Mike, that's often overlooked, but is the government guaranteed mortgage market. And if you look at the mortgage market, it's been very well contained. It has incremental spread. It has spread relative to the corporate market. And right now if you if you take a look at that that. Behaves like a risk off asset as well. So putting these things together is you know that that's that's what we do here at double line and we think that building that together, you could still generate, you know, 5 1/2 to 6% on an extremely high quality portfolio. And so if you look at what's happened over the last couple of months, you know, the bond market has been your friend. And I think as as you rethink this and you look at rebalancing, it's a good opportunity to continue to marginally add to those positions. It's true bond market is has done its job of acting as a bit of a. A cushion and offset to to equity Vol recently. Jeff, great to talk to you. Thanks so much. Thanks for having me today. Appreciate it.