DoubleLine Deputy Chief Investment Officer Jeffrey Sherman on June 26, 2023, shares on Bloomberg ETF IQ his view on why the Federal Reserve should pause its rate-hiking “at least throughout summer.” He also warns that the longer the federal funds rate “stays at this level, I think it continues to put pressure on the banking system. It wakes people up to realize they’re not getting market rates in their deposits. Janet Yellen will sell you T-bills all day long with a five handle on them.” Given weakness in some of the macroeconomic data and deep inversion of the U.S. Treasury yield curve, Mr. Sherman also makes the case for allocating part of one’s fixed income portfolio to longer-dated high grade bonds.
Turning to DoubleLine-managed bond ETFs, he explains the reasoning behind their portfolio composition, including recent 15-year highs on Agency MBS spreads over Treasuries. Seeing a recession “in the cards in the next 12 months,” he describes the macro indicators flashing red and two that have not yet given up the ghost: ISM Services and the labor market. In terms of fixed income credit, he identifies one of the zones under stress is the leveraged loan market, as those assets have seen their floating-rate debt service rise by 500 basis points. High yield and investment grade corporate bonds, being fixed rate, have locked in low-cost financing that won’t face maturities for 12 to 18+ months, Mr. Sherman notes.
Credit quality ratings apply to the credit worthiness of the issuers of the underlying securities and not to the fund itself. Ratings are expressed as letters ranging from ‘AAA’, which is the highest grade, to ‘D’, which is the lowest grade. Bonds with a rating of BBB- (on the Standard & Poor's and Fitch scale) or Baa3 (on Moody's) or better are considered "investment-grade." Bonds with lower ratings are considered "speculative" and often referred to as "high-yield" or "junk" bonds.
Basis points (or basis point (bp)) refer to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% or 0.0001, and is used to denote the percentage change in a financial instrument. The relationship between percentage changes and basis points can be summarized as: 1% change = 100 basis points; 0.01% = 1 basis point.
The Legal Entity Identifier (LEI) is a reference code — like a bar code — used across markets and jurisdictions to uniquely identify a legally distinct entity that engages in a financial transaction. Secured
Overnight Financing Rate (SOFR) – Benchmark interest rate for U.S. dollar-denominated derivatives and loans that is replacing the London Interbank Offered Rate (LIBOR). Interest rate swaps on more than $80 trillion in notional debt switched to the SOFR in October 2020. This transition is expected to increase long-term liquidity but also result in substantial short-term trading volatility in derivatives.
As DoubleLine’s Deputy Chief Investment Officer, Jeffrey Sherman oversees and administers DoubleLine’s Investment Management sub-committee coordinating and implementing policies and processes across the investment teams. He also serves as lead portfolio manager for multi-sector and derivative-based strategies. Mr. Sherman is a member of DoubleLine’s Executive Management and Fixed Income Asset Allocation Committees. He can be heard regularly on his podcast “The Sherman Show” (Twitter @ShermanShowPod, ShermanShow@Doubleline.com) where he interviews distinguished guests, giving listeners insight into DoubleLine’s current views. In 2018, Money Management Executive named Jeffrey Sherman as one of “10 Fund Managers to Watch” in its yearly special report. Prior to joining DoubleLine in 2009, Mr. Sherman was a Senior Vice President at TCW where he worked as a portfolio manager and quantitative analyst focused on fixed income and real-asset portfolios. He was a statistics and mathematics instructor at both the University of the Pacific and Florida State University. Mr. Sherman taught Quantitative Methods for Level I candidates in the CFA LA/USC Review Program for many years. He holds a B.S. in Applied Mathematics from the University of the Pacific and an M.S. in Financial Engineering from the Claremont Graduate University. Mr. Sherman is a CFA® charterholder.
