Are we going to have a recession? Are we already in a recession?
Nobody knows despite a de-inverting yield curve and the Sahm Rule being triggered recently – two frequently reliable indicators of economic slowdown. DoubleLine deputy CIO Jeffrey Sherman told VettaFi, “It’s premature to call [the current situation] recessionary.”
But that doesn’t mean we’ll dodge the bullet forever. Sherman and the DoubleLine team led by founder Jeffrey Gundlach have been anticipating a slowdown for a few quarters now and see mixed economic data.
Sherman acknowledged “some signs of weakening” and said the market was jarred by the recent jobs report. That’s when the Sahm Rule, named after economist Claudia Sahm, was triggered. The rule says when the 3-month moving average in unemployment exceeds its lowest reading for the past year by 0.5 percentage points or more, the recession has likely started. It has as impressive a record as a de-inverting yield curve for forecasting a recession. Notably, it was higher than the previous 12-month low by 0.53 percentage points.
In DoubleLine’s webcasts and media appearances, Gundlach stressed that those waiting for employment to roll over before making the recession call may be making a mistake. Employment is a lagging indicator, making it a better signal that the slowdown is already upon us.
Sherman, showing caution, said immigration may be changing the employment picture, as Sahm herself has said in recent interviews. Sherman observed “a disconnect between the establishment survey and the household survey. The reason for the big differential is immigration.”
The household survey counts employees who hold multiple jobs multiple times. In contrast, the establishment survey counts each person once regardless of how many jobs they hold.
Sherman also noted that JOLTS (Job Openings and Labor Turnover Survey) data “shows more jobs available than people looking for work. . . . .[It’s] much more balanced than it was 18 months ago. Availability of jobs is slowing, so it feels like labor is slowing, but overall, [there’s not] broad-based unemployment.”
As for yield curve de-inversion, Sherman said on August 12: “We’ve seen 2s-30s de-invert, but [they are] back to [somewhat more pronounced] inversion. There was recently de-inversion, but only for a couple of minutes.” Measuring the difference in yield on the 2-year and 10-year U.S. Treasuries, the current yield curve inversion is 22 months old, the longest on record.
As a result, according to Sherman, the bond market has “been looking for any reason to front-run [a Fed cut] trade. The bond market has wanted rate cuts…and the Fed gave its signal that it will cut in September.”
From July 1 through August 15, the Bloomberg US Aggregate was up 3.44%. This represents a large move in a short span for investment-grade bonds. Longer-term Treasuries rallied even harder, with the iShares 20+ Year Treasury Bond ETF (TLT ) up 6.41% and the PIMCO 25+ Year Zero Coupon US Treasury ETF (ZROZ ) up 9.33% over that span.
Investment grade corporates rallied, too, with the iShares iBoxx Investment Grade Corporate Bond ETF (LQD ) up 4.26% for the period.
Sherman noted, “The credit markets aren’t showing any stress at all,” despite the stock market’s hiccup two weeks ago, which included Japanese stocks plummeting more than 14% in one session. “There are deal announcements [and some] signs that [companies] are trying to jam it before [things slow down].”
Overall, Sherman thinks “recession [risk] has probably increased, but [isn’t] imminent. The probability is as high as it’s been, but not 100%.”
DoubleLine Opportunistic Bond ETF Positioning
The DoubleLine Opportunistic Bond ETF (DBND ) is positioned similarly to the Bloomberg US Aggregate in terms of its duration – 6 years — but it arrives there in a different way.
Sherman and Gundlach manage the ETF, which has similarities to, but a bit more latitude than, the DoubleLine Core Fixed Income (DBLFX) mutual fund.
According to Morningstar data, the fund is underweight versus its peers in holdings that mature in a 7-10 year period. Less than 6% of the fund’s holdings mature in this range, while more than 17% mature in that range for its average peer and 26% for the iShares Core U.S. Aggregate Bond ETF (AGG ).
Instead, the DoubleLine fund is heavier in the 5-7-year range (18% of its portfolio versus 13.3% for its average peer). It also has around 56% of its portfolio in bonds maturing in 15 years or more compared to around 46% for its average peer in that maturity range. Sherman described this as a “curve steepener” trade or positioning.
DBND’s largest weighting, at 21%, is to Agency RMBS, which the firm argues has been cheap since the Fed ending quantitative easing in 2022. Another 20% of the fund’s assets are in Non-Agency RMBS and CMBS.
The fund’s allocation provides a yield pickup of nearly 0.50 percentage points. The iShares Core Aggregate fund is yielding 4.34%. Meanwhile, DBND is yielding 4.81%, according to both firm’s websites as of August 17.
From the fund’s inception on March 31, 2022, through August 16, 2024, it has returned 1.35% on an annualized basis, making it the 32nd-best performer out of 173 active funds in Morningstar’s Intermediate Core-Plus Bond fund category during that period.
The Bloomberg US Aggregate, by contrast, has a 0.18% annualized return over that time frame.
U.S. Debt Matters
Recessionary fears have been good for the bond market since July. However, Sherman and DoubleLine are worried about inflation over the longer term because of the U.S. debt load.
“No matter who wins the election, we’ll continue to spend money,” said Sherman. He fears that during the next recession, yields could go up as government revenues decline and debt financing becomes harder.
“Recessions hurt deficits,” Sherman said. “We spent a lot of money last two times [to combat recession]. If you want to stimulate, you’ll have to do something similar. [The] next recession could make yields go up.”
Sherman cited Liz Truss in the UK as an example. Truss sparked a rebellion in the bond market when she became prime minister by proposing to lower taxes. “Truss said ‘we’re going to cut taxes,’ and the bond market puked. We could face a similar situation. Then we’ll be forced into austerity.”
Sherman said, “We are still one of the better fiat currencies,” but indicated that he’s “renting the long bond” as we rotate into inflation when the next recession begins. Sherman said gold would be a sensible part of an asset allocation in preparation for that too.
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