Channel 11: A November to Remember

DoubleLine Portfolio Manager Ken Shinoda on Dec. 6, 2023, reviews a risk rally in global equity markets (0:05) and a duration-driven rally in U.S. fixed income (2:38) in November amid a mixed bag for commodities (1:21). Behind those moves, Mr. Shinoda notes a big change in investor expectations of the Federal Reserve (4:00), with the market anticipating a federal funds rate of 4% by the end of 2024 versus 4½% just a month prior, a shift that came on the back of weaker economic data.

Notwithstanding the recent rally in high-grade bonds, Mr. Shinoda thinks yields on U.S. Treasuries, while due for a pause, have room to fall further (7:12) if indeed the Fed has reached the end of its tightening campaign, and the economy and inflation continue to slow. “Even if they don’t cut rates, if inflation comes down, real yields go up,” he says, leading to more restrictive financial conditions and pressure on the Fed to cut.

DoubleLine is on recession watch. Given valuations, Mr. Shinoda says, “equities seem to be pricing in no risk of recession here, and bonds maybe can benefit if we do see that further slowdown.” The last leg in the economy is the consumer (9:49). Excess savings lasted longer than economists had projected, but those reserves are being spent, and consumers are increasingly turning to credit cards to make ends meet. He also points to (12:00) contractionary declines in bank lending, which bodes poorly for small business (an important source of employment), tightening lending standards and weaker business demand for loans. Even short of an outright recession, this context suggests at minimum slowing growth and cooler inflation, a good backdrop for fixed income.

High-quality fixed income (13:361) still offers yields of 6%; parts of the diversified core area of the fixed income universe offer yields in the high 6% or 7%, Mr. Shinoda notes. Double-digit yields are available further out in credit risk. Those waters hold default risk, “but if you believe in the credit and you can do security selection and credit underwriting,” he says, “you’re going to realize these yields through time as these bonds pay their coupons and eventually mature, hopefully at par. Or, even if they take a little bit of losses, when you’re buying bonds at discounts, you have the ability to take some of those losses, too.” AAA parts of securitized sectors (15:27) look cheap to Mr. Shinoda on a relative value basis, and he expects them to catch up to corporates in 2024.