S3 E9: Opportunities in Fixed Income

DoubleLine Capital Portfolio Manager Ken Shinoda on Nov. 18, 2022, discusses (0:28) with Graham Hopper, head of the firm’s advisor team, compelling risk-return opportunities in fixed income, both in government-guaranteed bonds, notably Agency mortgage-backed securities (Agency MBS) and in credit, especially securitized credit. Mr. Shinoda observes that (3:06) managers of core plus bond funds “tend to overweight corporate credit while hugging the duration” of the Bloomberg US Aggregate Bond Index. This year, that strategy approach put them behind the index due to the coincident widening of spreads and rising of interest rates amid the significant duration of investment grade corporate bonds.

Messrs. Shinoda and Hopper then review (8:09) the year-to-date repricing of the different areas of the fixed income universe. While painful, that event has left all its sectors offering significantly higher yields than has prevailed in years. Assessing the yield landscape (16:56), Mr. Shinoda observes that managers can construct portfolios yielding almost 5% with the lowest risk parts of the bond market; 6½% with a mix of safety assets and credit; and “high single-digit, low double-digit yields, using the bottom of the investment grade and top of the below-investment grade market.” Investors willing to take more volatility, he says, have the potential to earn returns in the mid-teens in parts of the securitized credit markets.

Agency MBS (23:59), Mr. Shinoda notes, not only offer the most attractive spreads he’s seen in a decade, their convexity, a measure for prepayment risk, has shifted from negative to positive for the first time since his career began in the early 2000s. This makes Agency MBS, he says, a competitive alternative to Treasuries and especially corporate bonds. Mr. Shinoda’s survey of securitized credit shows that pockets of investment grade securitized credit (32:00) offer wider credit spreads than can be found in some corporate high yield bonds.

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