February 7, 2023

Diversified Fixed Income Webcast "Bonds in the Year of the Rabbit" 2-7-23: Macro

Mr. Sherman begins his Feb. 7, 2023, macro review (1:47) with a look at “U.S. Real GDP and Trend Forecast” based on the outlook by the International Monetary Fund and odds of recession. Based on Wall Street estimates and the Atlanta Fed’s GDPNow model estimate for real GDP (4:40), he thinks the U.S is probably on track for “a sub 1% growth rate in the first quarter,” but at least the figure is positive. Looking at the Citi Economic Surprise Index for a global perspective (5:24), he points out that growth in the U.S., Europe and China has surprised to the upside versus consensus estimates. Among the “harbingers of negativity,” Mr. Sherman points to the Conference Board’s index of leading indicators (9:54) and an “unprecedented” contraction in M-2 money supply (11:09).

Mr. Sherman surveys a raft of measures (12:35) pointing to “some form of slowdown in inflation.” These include among others Export and Import Prices, ISM Manufacturing Supplier Delivery Delays, ISM Manufacturing Prices Paid, Core CPI Components and U.S. Inflation Breakeven Spread. He then turns to the still-strong labor market (20:24). In particular, he zeros in on the still-understaffed services sector. Focusing on the Federal Reserve’s balance sheet (28:19), he notes that the Fed has been “on autopilot,” paring its Treasury holdings by $250 billion/month.

The upshot “from the macro,” Mr. Sherman says (31:36), “is it’s a conflicting data set because the powerful indictors are still there, but so many of things we’ve relied on in the past to signal recession are indeed flashing warning signs. So I think it’s prudent to stay cautious when thinking about your allocation.” Turning to markets (32:01), he reviews 2022, the worst year for bonds on record, breaking down the sectors and subsectors of the Treasury market and credit. Looking at possible clues for an outlook on interest rates, Mr. Sherman says that the copper-gold ratio indicates the 10-year Treasury yield is still too high, although he adds that the recent rally in copper prices was due to copper mine closures in Peru. In the wake of 2022 (37:42), he welcomes the return of “old school yields” and a “bond market set up for some of the best cheapness we have seen.” He then proceeds to describe how to combine Treasuries at the longer end of the curve with attractively priced/yielding credit, noting that in the face of economic weakness the Treasury holdings “can make meaningful money.”



  • Jeffrey Sherman, CFA

    Jeffrey Sherman, CFA

    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, 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.