Channel 11: A Second Chance for Yield Allocations

In Channel 11’s September 2024 market review , DoubleLine Portfolio Manager reviews stretched valuations in equities amid a backup in fixed yields and concludes now is “definitely a time to start looking at the market for a potential chance to add some fixed income to your portfolio, whether it’s Treasuries, whether it’s pockets of the credit markets.” This video was recorded Oct. 8, 2024. (00:00)

September highlights:

(2:07) The paring back of market bullishness with respect to fed funds cuts in the wake of economic surprises to the upside, including a stronger-than-expected U.S. labor report.

(3:38) A narrowing of credit spreads from Agency mortgage-backed securities (MBS) to private-label residential MBS to corporates to emerging market sovereigns and corporates.

(5:43) A longer-term historical horizon for U.S. Treasury yields across the curve: “I know Treasuries have rallied off the highs of 470 basis points this year; we're at 4%. But in the big scheme of things, we are still at very high levels and absolute yields going back over the last 10 years. So you haven't missed the opportunity” to allocate out from Treasury bills to further out the curve.

(6:58) Opportunities in lower-quality fixed income for active manager who “can sprinkle in some of this credit risk and boost the yield in core-plus portfolios. Or you can think about multi-asset credit solutions where you can probably get yields close to about 6 ½% to 7% in a in a moderate-risk portfolio – moderate being something like a weighted average rating of double B.”

(7:39) Yield as a future determinant of future fixed income returns. “Locking in returns today of 5% to 5 ½% on intermediate-term bonds and locking in those potential returns of 6 ½%, 7% in the multi-asset credit portfolio we think is attractive.”

(8:31) With U.S. equities priced at historically high cyclically adjusted price-to-earnings (CAPE) ratios, Mr. Shinoda notes the historical record suggests muted returns for the 10-year forward annualized return of the S&P 500.

(10:00) Macroeconomic prints, including inflation (through August), wage growth, the divergent manufacturing (recessionary) and services (expansionary) halves of the economy, unemployment and small business hiring.

(11:47) The continuing surge in equity prices: The S&P 500 again was the winner, with U.S. small-cap stocks and emerging markets equities playing a bit of catchup, the latter on the back of China stimulus. “Stellar returns for equities,” Mr. Shinoda notes, “doesn't mean it's going to continue, which is why I think fixed income is potentially interesting here – to add fixed income to create stable returns for the future.”

(15:15) The U.S. Dollar Index vs. the U.S. 10-Year Yield, which have tracked each other. “I think these will continue to move in tandem in the near term.”

(15:39) Commodities picking up tailwinds from China stimulus and energy supply fears amid conflict in the Middle East.