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My name is Ignacio Sosa. I am the director of international relationship management at DoubleLine Capital in Los Angeles.
Corporate bonds have had a terrific year. You’re talking about low double-digit returns for investment-grade corporates and a little bit lower returns for high-yield corporates, so a very good return. But a lot of this is driven by the fallen rates and U.S. rates. So, the sensitivity of investment-grade corporates to U.S. interest rates is particularly concerning because the spread that this universe has, let’s say, relative to U.S. Treasurys, is relatively low. It’s around 120 basis points, which means that you get paid about 120 basis points more to buy an investment-grade corporate bond versus a U.S. Treasury. That sounds to us to be relatively tight, as they say in the market.
And so the risk that you’re taking on at this point is, to a very large extent, twofold. One is that the investment-grade corporate bond market has a relatively high sensitivity to interest rates. The duration is around seven years, seven-plus years for the market overall, and it also means that the cushion that’s provided by the spread is pretty low in the event that rates go up. So there’s that, and then there’s the fact that if we do go into recession, corporate bond spreads are likely to go up. The chances of a recession at this point appear 50/50. But 50/50 is not zero. So to have a product or an asset class like investment-grade corporates in particular that has a very high sensitivity to interest rates and a relatively low credit spread in a situation where one expects a 50/50 chance of a recession doesn’t sound to us like a good risk proposition.
In terms of opportunities in the bond universe, the good news is the consumer in the United States is doing relatively well. One of the things we look at with a flexible yield strategy is what types of credit are available to us. The reflexive view of most people when it comes to credit is, well there’s only really one kind of credit: corporate credit. We say baloney. There isn’t only one kind of credit. Yes, corporate credit, whether it’s investment-grade, high yield, or loans is part of the credit universe, but there’s all a lot more in that. There’s non-guaranteed mortgages in the United States, commercial mortgage-backed securities, there’s asset-backed securities, there’s collateralized loan obligations, and not to mention there’s emerging market debt in dollars. We think all of these have better value than the corporate bonds. Some of them, for example, have — the CLOs and others — have relatively low sensitivity to interest rate movements.
And then secondly, the fundamentals that underpin many of these, particularly like I said in the housing market, they seem relatively strong compared to other sectors. So at this point, we would like to pick securities in the credit sphere that are not just corporate credit risk, which is record highs in terms of issuance and in terms of the stock of the debt. So tight prices for investment-grade corporates, huge supply, a 50/50 chance of recession, just would not make us comfortable that this is an asset class that we would want to overweight.