Channel 11: The Bond Vigilantes Are Back

DoubleLine Portfolio Manager Ken Shinoda on Oct. 10, 2022, reviews macro and markets for 2023 year-to-date (YTD) and September, including a surge in yields across the Treasury market (0:05). While painful, that move in rates, he notes, has produced compelling investment opportunities across the bond market, in Treasuries, higher-grade bonds (5:15) and, for those pursuing equity-like returns (6:20), riskier credits offering yields in the high single digits to midteens.

Mr. Shinoda then analyzes the causes (7:17) behind the surge in interest rates in 2023: economic surprises to the upside, including better-than-expected second quarter GDP growth, retail sales, services PMI readings and jobs reports. He notes, however, that Citi’s economic surprise plot might have started to ease. That along with tame inflation breakeven rates, Mr. Shinoda says, might be a harbinger of lower or at least stable rate levels.

In his review of equities (10:11), particularly in September/early October, Mr. Shinoda notes, “With inflation breakevens basically sideways and rates higher, that means real yields have made a big move up in real yields. And higher real yields pressure equity prices.” While the S&P 500 managed to bounce off its 200-day moving average, he observes that the Russell 2000 has broken down below its 200 DMA. Commodities (11:20) have been a “mixed bag” with oil up but much of the remainder of the commodity complex in the red YTD.

Digging into the fundamentals of U.S. companies and consumers (12:27), Mr. Shinoda foresees the cost of servicing debt as burdens for companies, especially those that must finance themselves at shorter-term rates, and consumers coming under an increasing financial squeeze. He further notes that Americans outside the wealthiest 20% have burned through their excess savings. Meanwhile, consumer credit delinquencies are rising among all age cohorts.

Coming to the upshot for investors (15:56), Mr. Shinoda singles out the areas of fixed income that he thinks appear the most attractive. In terms of yield spread, Agency mortgage-backed securities represent his highest-conviction idea.