Navigating the Fixed Income Minefield

Transcription

1 Navigating the Fixed Income Minefield Jeffrey Sherman, CFA Portfolio Manager DoubleLine Capital February 20, 2014

2 When all the experts and forecasts agree -- something else is going to happen. - Bob Farrell 1

3 Consensus Dramatic on Wall Street Equities vs. Fixed Income 2014 Outlook BAML Barclays Capital BlackRock BNP Paribas CITI Credit Suisse Deutsche Bank Goldman Sachs HSBC Jefferies JP Morgan Morgan Stanley UBS Global Equities Global FI 2014 Equity Market Cross Asset Weights BAML Barclays Capital BlackRock BNP Paribas CITI Credit Suisse Deutsche Bank Goldman Sachs HSBC Jefferies JP Morgan Morgan Stanley UBS US Equity Asia Equity Japan China European Equity UK Emerging Markets Developed Markets OVERWEIGHT (GREEN) NEUTRAL (GREY) UNDERWEIGHT (RED) Source: 2

4 Fed s Forecasting Track Record Source: Fed = Federal Reserve 3

5 Fed s Forecasting Track Record Source: Bianco Research, Washington Post Fed = Federal Reserve, GDP = Gross Domestic Product 4

6 Fed Governors Forecasts of Fed Funds Rates Source: Bianco Fed = Federal Reserve 5

7 Average Annual Real GDP Growth by Decade Average Historical Real U.S. GDP Growth by Decade 7% 6.38% 6% 5.59% 6.04% 5% 4.49% 4.24% 5.03% 5.16% 4.52% 4.25% 4% 3% 3.73% 3.26% 3.89% 3.07% 3.73% 2.92% 2.67% 3.56% 3.24% 3.14% 3.25% 2.46% * 2% 1.81% 1.33% 1% 0% * 2010 s : Average of 2010, 2011, 2012 and 2013 Real GDP Growth Data Source: Measuring Worth, DoubleLine Capital GDP = Gross Domestic Product 6

8 Price of Home Purchased with 20% down & $1000 Mortgage Payment Average 30 Year Fixed Mortgage Rate June 30, January 31, 2014 Cost of Home Mortgage Sensitive to Rate Rise $400,000 $350,000 Average 30 Year Fixed U.S. Home Mortgage Rate (bankrate.com) (RHS) Price of Home Purchased with 20% Down and $1000 Mortgage Payment(LHS) 9% 8% $300,000 7% $250,000 $200,000 $150,000 $247,000 $208,000 6% 5% 4% 3% $100, % 6.0% 2% $50,000 1% $0 0% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00% 11.00% 12.00% 13.00% 14.00% Mortgage Interest Rate Data Source: Bloomberg, US Census Bureau, DoubleLine Capital 7

9 Net Household Wealth (Billions USD) 1Q Q 2013 S&P 500 TR and Case Shiller 10 1Q Q 2013 Total U.S. Household Wealth vs. Major Assets $90, $80, $70, $60,000 $50,000 $40, $30,000 $20,000 $10,000 Total Houshold Wealth (LHS) SP500 Total Return (RHS) Case Shiller 10 (RHS) $0 0 Source: Bloomberg, DoubleLine Capital 8

10 Real Total Household Wealth in (Billions USD) Real Median Household Income in 2011 Dollars U.S. Median Household Income vs. U.S. Total Household Wealth $60,000 $57,000 $56,000 $50,000 $55,000 $40,000 $54,000 $53,000 $30,000 $52,000 $20,000 $10,000 Real Total Houshold Wealth (RHS) Real Median Household Income (LHS) $51,000 $50,000 $49,000 $0 $48,000 Source: Bloomberg, DoubleLine Capital 9

11 Wages & Salary Accrual / Gross Domestic Product Q through Q Wages and Salary as a Percentage of GDP 55% 51.7% Q % 45% 42.7% Q % 42.1% Q Source: Bloomberg, DoubleLine Capital 10

12 Wages and Productivity Growth Source: 11

13 US Employment to Population Ratio (%) December 31, 1990 December 31, 2013 US Unemployment Rate (%) December 31, 1990 December 31, 2013 Unemployment Situation US Employment to Population Ratio (LHS) US Unemployment Rate (RHS) Source: Bloomberg 12

14 Economic Actviity and M2 in Billions USD Velocity of Money (M2) Velocity of Money March 31, 1970 through December 31, 2013 $18, $16,000 $14,000 Economic Activity (M2 * V) M2 ($) Velocity ($) {RHS} $12,000 $10, $8,000 $6, $4, $2, $0 1.5 Source: Bloomberg, DoubleLine Capital 13

15 Index Level YoY Change January 31, 1960 through December 31, 2013 Inflation Measurements at Low Levels Consumer Price Index Personal Consumption Expenditure Index Source: Bloomberg, DoubleLine Capital 14

16 Percent April 26, January 31, 2014 Inflation Expectations Federal Reserve 5 Year Inflation Expectation Five Year Five Years Forward 5 Year Breakevens 10 Year Breakevens Source: Bloomberg 15

17 Historical Impact of Quantitative Easing in Japan Source: St. Louis Fed, 16

18 Federal Reserve Balance Sheet (Millions USD) December 31, January 31, 2014 Federal Reserve Balance Sheet $4,500,000 $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 Special Purpose Credit Facility Treasury Currency Outstanding SDR Gold Other Federal Reserve Assets Central Bank Liquidity Swaps Float Distressed Asset Credit Facility Other Credit Extensions Term Asset Backed Securities Loans Seasonal Credit Secondary Credit Primary Credit Repurchase Agreements MBS Agency MBS Inflation Compensation TIPS Nominal Notes and Bonds Treasury Bills $1,000,000 $500,000 $0 Source: Bloomberg, DoubleLine Capital You cannot invest directly in an Index. 17

19 Taper Path Outlook As of December 31, 2013 Source: GS F cast = Goldman Sachs Forecast 18

20 5.0% 10-Year Treasury Yield during Fed Open Market Committee Action March 18, 2009 through January 31, % -126 bps 4.0% 3.5% -130 bps +122 bps -25 bps 3.0% 2.5% 2.0% +129 bps +59 bps +10 bps +5bps 1.5% 1.0% -24 bps +120 bps No Policy QE1 Expansion QE2 Op Twist Op Twist Extension and QE3 QE3 Expanded Taper Talk No Taper Taper $20B Source: Bloomberg, DoubleLine Capital Past performance is no guarantee of future results. You cannot invest directly in an index. 19

21 Year Treasury Performance during Fed Open Market Committee Action March 18, 2009 through January 31, % % +1% +2% % 520 Cum: +15% +12% % -7% % % No Policy QE1 + EXPANSION QE2 Op Twist Op Twist Extension and QE3 QE3 Expanded Taper Talk No Taper Taper $20B Source: Bloomberg, DoubleLine Capital Past performance is no guarantee of future results. You cannot invest directly in an index. 20

22 6.0% 30-Year Treasury Yield during Fed Open Market Committee Action March 18, 2009 through January 31, % -67 bps 5.0% -138 bps 4.5% +101 bps -31 bps 4.0% 3.5% 3.0% +118 bps +33 bps +21 bps +7bps 2.5% 2.0% -26 bps +102 bps No Policy QE1 Expansion QE2 Op Twist Op Twist Extension and QE3 QE3 Expanded Taper Talk No Taper Taper $20B Source: Bloomberg, DoubleLine Capital Past performance is no guarantee of future results. You cannot invest directly in an index. 21

23 30-Year Treasury Performance during Fed Open Market Committee Action 900 March 18, 2009 through January 31, % % Cum: +17% +13% -1% -1% +6% % % % -3% 400 No Policy QE1 + EXPANSION QE2 Op Twist Op Twist Extension and QE3 QE3 Expanded Taper Talk No Taper Taper $20B Source: Bloomberg, DoubleLine Capital Past performance is no guarantee of future results. You cannot invest directly in an index. 22

24 S&P 500 Performance during Fed Open Market Committee Action March 18, 2009 through January 31, % +8% Cum: +119% -11% +6% % +5% +27% % +16% % No Policy QE1 + EXPANSION QE2 Op Twist Op Twist Extension and QE3 QE3 Expanded Taper Talk No Taper Taper $20B Source: Bloomberg, DoubleLine Capital Past performance is no guarantee of future results. You cannot invest directly in an index. 23

25 1600 U.S. High Yield Performance during Fed Open Market Committee Action March 18, 2009 through January 31, Cum: +131% +10% -3% -1% +3% +1% % +7% % +9% % No Policy QE1 + EXPANSION QE2 Op Twist Op Twist Extension and QE3 QE3 Expanded Taper Talk No Taper Taper $20B Source: Bloomberg, DoubleLine Capital Past performance is no guarantee of future results. You cannot invest directly in an index. 24

26 2600 Bank Loan Performance during Fed Open Market Committee Action March 18, 2009 through January 31, % +0% 2200 Cum: +85% +4% +1% +1% +5% % % +6% % 1200 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 No Policy QE1 + EXPANSION QE2 Op Twist Op Twist Extension and QE3 QE3 Expanded Taper Talk No Taper Taper $20B Source: Bloomberg, DoubleLine Capital Past performance is no guarantee of future results. You cannot invest directly in an index. 25

27 1200 International - Emerging Markets Performance during Fed Open Market Committee Action March 18, 2009 through January 31, Cum: +68% +13% +1% +11% -8% +2% -1% 900-5% +9% % % 500 No Policy QE1 + EXPANSION QE2 Op Twist Op Twist Extension and QE3 QE3 Expanded Taper Talk No Taper Taper $20B Source: Bloomberg, DoubleLine Capital Past performance is no guarantee of future results. You cannot invest directly in an index. 26

28 Peak to Trough Drawdown December 31, 2012 through January 31, 2014 Drawdown across Fixed Income Sectors 0% -2% -4% -6% -8% -10% -12% -14% -16% -18% -20% 10Y TSY 30Y TSY US Corporates US Cash Pay High Yield International Developed International Emerging Mortgage Backed Securities Bank Loans Source: Bloomberg, DoubleLine Capital Past performance is no guarantee of future results. You cannot invest directly in an index. 27

29 60 Month Correlation Matrix of Fixed Income Returns As of December 31, 2013 US Government Municipal Agency MBS CMBS ABS US IG Credit US HY Credit Bank Loans Convertibles International Sovereign EM Sovereign EM Corporate Inflation Linked T-Bills US Government 1.00 Municipal Average Correlation 0.36 Agency MBS CMBS ABS US IG Credit US HY Credit Bank Loans Convertible International Sovereign EM Sovereign EM Corporate Inflation Linked T-Bills Source: Bloomberg, DoubleLine Capital Past performance is no guarantee of future results. You cannot invest directly in an index. 28

30 Heat Map of Fixed Income Sector Returns International Sovereign 19.99% US HY Credit 27.23% EM Sovereign 11.62% EM Sovereign 10.25% Convertibles 12.75% Inflation Linked 11.61% International Sovereign 14.46% US HY Credit 56.28% CMBS 18.35% Inflation Linked 14.01% EM Sovereign 17.44% Convertibles 25.00% Inflation Linked 16.71% Convertibles 25.80% US HY Credit 10.76% EM Corporate 6.10% US HY Credit 11.64% International Sovereign 10.92% US Government 12.78% Bank Loans 51.62% Convertibles 16.52% Municipal 11.19% US HY Credit 15.44% US HY Credit 7.38% CMBS 14.83% EM Sovereign 13.65% US Government 11.30% EM Sovereign 22.21% EM Corporate 16.22% International Sovereign 16.22% International Sovereign 10.53% EM Corporate 10.27% Convertibles 8.49% Bank Loans 5.06% Municipal 3.94% ABS 3.41% EM Sovereign 9.86% Bank Loans 6.74% EM Corporate 6.53% US Government 8.76% Agency MBS 6.96% EM Sovereign 6.16% Agency MBS 8.30% T-Bills 1.80% Inflation Linked -1.17% Convertibles 47.19% EM Corporate 34.88% EM Sovereign 29.82% US HY Credit 15.24% EM Corporate 13.08% EM Sovereign 12.24% US Government 9.19% International Sovereign 7.83% US IG Credit 7.51% EM Corporate 15.01% Convertibles 14.41% US IG Credit 10.37% Bank Loans 5.29% ABS 0.91% CMBS 0.40% EM Corporate 10.90% Bank Loans 9.97% Inflation Linked 8.40% T-Bills 3.00% ABS 5.43% CMBS 4.98% Municipal -3.95% CMBS 27.85% International Sovereign 10.52% EM Sovereign 7.35% Bank Loans 9.67% T-Bills 0.05% Municipal 10.73% US IG Credit 10.17% US IG Credit 8.31% Inflation Linked 8.26% Municipal 5.45% US IG Credit 5.41% Inflation Linked 2.86% US HY Credit 2.83% Agency MBS 5.32% International Sovereign 5.30% T-Bills 4.74% US IG Credit 4.64% US IG Credit -6.82% EM Sovereign % US IG Credit 19.76% Municipal 14.45% Bank Loans 10.13% US IG Credit 9.52% CMBS 6.20% Agency MBS 6.14% CMBS 9.07% Municipal 7.26% EM Corporate -0.60% Agency MBS -1.39% Agency MBS 9.41% Municipal 6.18% Bank Loans 5.17% US Government 2.66% CMBS 4.98% Convertibles 4.12% EM Corporate % ABS 10.62% Inflation Linked 6.46% US HY Credit 4.50% Inflation Linked 7.18% US IG Credit -1.46% ABS 4.88% CMBS 4.74% Agency MBS 4.74% Agency MBS 2.62% Municipal 4.96% EM Corporate 3.91% CMBS % Inflation Linked 10.12% Agency MBS 5.67% EM Corporate 2.32% ABS 3.03% Municipal -2.89% Bank Loans 1.91% Agency MBS 3.29% CMBS 4.51% US IG Credit 1.97% T-Bills 4.76% Municipal 3.29% ABS % Agency MBS 5.76% US Government 5.61% Bank Loans 1.51% Agency MBS 2.59% US Government -3.21% T-Bills 1.70% US HY Credit -1.14% Convertibles -4.95% US Government 2.36% ABS 2.27% T-Bills 1.07% US Government 3.42% ABS 2.33% T-Bills 1.24% CMBS 1.84% Convertibles -0.34% International Sovereign -9.50% US IG Credit 4.38% US Government 3.48% Inflation Linked 0.40% US HY Credit 2.17% Bank Loans 2.08% ABS -4.02% Source: Bloomberg, DoubleLine Capital Past performance is no guarantee of future results. You cannot invest directly in an index. US HY Credit % Bank Loans % Convertibles % International Sovereign 2.33% T-Bills 0.16% US Government -2.58% ABS 5.02% Municipal 2.25% T-Bills 0.13% ABS 1.43% T-Bills 0.08% Convertibles -3.42% US Government 2.19% T-Bills 0.07% International Sovereign -2.35% EM Sovereign -5.25% International Sovereign -9.00% Inflation Linked -9.37% 29

31 Years Yield to Maturity (%) Yield Per Unit of Duration Percentage (%) of Barclays U.S. Aggregate Current View of the World Aggregate Yield and Duration Bond indexing currently presents challenges in the Index Composition 1 current low-yield environment 100% Since Treasuries are the lowest yielding sector of the 90% US fixed income market and Treasuries make up a 80% 70% larger portion of the index, the yield has diminished 60% significantly 50% 40% Simultaneously, the duration of the index has 30% lengthened more than a year to around 5 years 20% 10% This puts the yield-to-duration ratio at the lowest 0% level since the inception of the Barclays US Aggregate Index Yield and Duration 2 Yield per Unit of Duration 2 Barclays U.S. Aggregate Yield and Duration January 30, 1976 to January 31, 2014 Duration (Mod. Adj.) Sector Composition of Barclays U.S. Aggregate January January 2014 U.S. Government U.S. Credit U.S. Mortgage Backed Securities Asset-Backed Securities CMBS Barclays U.S. Aggregate Yield Per Unit of Duration January 31, 1976 to January 31, January 31, 1973 January 31, 2014; Source Barclays Capital, DoubleLine Capital 2. January 31, January 31, 2014; Source Barclays Capital, DoubleLine Capital You cannot invest directly in an index. 30

32 Current Market Yields in Various Fixed Income Sectors With the developed world continuing down the path of quantitative easing, the traditional sectors of the global fixed income market are providing yields of less than 4%. However, other sectors of the fixed income market still offer relatively attractive yields. Sector Yield U.S. Government Securities 1.45% International Sovereign Debt 1.07% Agency Residental Mortgage-Backed Securities 2.89% Commercial Mortgage-Backed Securities 2.25% U.S. Investment Grade Corporate 3.16% Emerging Markets Sovereign Debt 5.64% Emerging Markets Corporate Debt 5.73% Non-Agency Residential Mortgage-Backed Securities* 5.00% Bank Loans 4.87% Global High Yield Corporate Debt 6.21% Collateralized Loan Obligations* 5.50% Traditional Bond Sectors (Barclays Global Aggregate Index sectors) Non-Traditional Bond Sectors As of January 31, Source: DoubleLine, Bank of America/Merrill Lynch Index Data, S&P/LSTA Leveraged Loan Index Data, JP Morgan Research U.S. Government Securities = G0A0, International Sovereign Debt = N0G0, Agency Residential MBS = M0A0, Commercial MBS = CMBS, U.S. Investment Grade Corporate = C0AO, Emerging Markets Sovereign Debt = IGOVA, Emerging Markets Corporate Debt = JPM CEMBI, *Non-Agency RMBS = Calculated by DoubleLine, Bank Loans = S&P/LSTA, Global High Yield Corporate Debt = J0A0, **Collateralized Loan Obligations = JP Morgan Research Seasoned BBB + BB issued average yield spread. Yields may not be reached based on various factors. You cannot invest directly in an index. Past performance is no guarantee of future results. 31

33 Navigating the Fixed Income Minefield Jeffrey Sherman, CFA Portfolio Manager DoubleLine Capital February 20, 2014

34 Disclaimer Important Information Regarding This Report Issue selection processes and tools illustrated throughout this presentation are samples and may be modified periodically. Such charts are not the only tools used by the investment teams, are extremely sophisticated, may not always produce the intended results and are not intended for use by non-professionals. DoubleLine has no obligation to provide revised assessments in the event of changed circumstances. While we have gathered this information from sources believed to be reliable, DoubleLine cannot guarantee the accuracy of the information provided. Securities discussed are not recommendations and are presented as examples of issue selection or portfolio management processes. They have been picked for comparison or illustration purposes only. No security presented within is either offered for sale or purchase. DoubleLine reserves the right to change its investment perspective and outlook without notice as market conditions dictate or as additional information becomes available. Important Information Regarding Risk Factors Investment strategies may not achieve the desired results due to implementation lag, other timing factors, portfolio management decision-making, economic or market conditions or other unanticipated factors. The views and forecasts expressed in this material are as of the date indicated, are subject to change without notice, may not come to pass and do not represent a recommendation or offer of any particular security, strategy, or investment. Past performance is no guarantee of future results. Important Information Regarding DoubleLine In preparing the client reports (and in managing the portfolios), DoubleLine and its vendors price separate account portfolio securities using various sources, including independent pricing services and fair value processes such as benchmarking. To receive a complimentary copy of DoubleLine s current Form ADV Part (which contains important additional disclosure information), a copy of the DoubleLine s proxy voting policies and procedures, or to obtain additional information on DoubleLine s proxy voting decisions, please contact DoubleLine s Client Services. Important Information Regarding DoubleLine s Investment Style DoubleLine seeks to maximize investment results consistent with our interpretation of client guidelines and investment mandate. While DoubleLine seeks to maximize returns for our clients consistent with guidelines, DoubleLine cannot guarantee that DoubleLine will outperform a client's specified benchmark. Additionally, the nature of portfolio diversification implies that certain holdings and sectors in a client's portfolio may be rising in price while others are falling; or, that some issues and sectors are outperforming while others are underperforming. Such out or underperformance can be the result of many factors, such as but not limited to duration/interest rate exposure, yield curve exposure, bond sector exposure, or news or rumors specific to a single name. DoubleLine is an active manager and will adjust the composition of client s portfolios consistent with our investment team s judgment concerning market conditions and any particular security. The construction of DoubleLine portfolios may differ substantially from the construction of any of a variety of bond market indices. As such, a DoubleLine portfolio has the potential to underperform or outperform a bond market index. Since markets can remain inefficiently priced for long periods, DoubleLine s performance is properly assessed over a full multi-year market cycle. Diversification does not assure a profit or protect against a loss in a declining market. Opinions expressed are subject to change at any time, are not a guarantee and should not be considered investment advice DoubleLine Capital LP 33