Ken Shinoda: Higher but Stable Is Good for Credit | Bloomberg TV

[00:00:04]Let's bring in Ken Shinoda of DoubleLine Capital portfolio manager. And Ken, there was a lot of focus, of course, on the rate decision itself, on the summary of economic projections, but no attention was really greater than what everybody was really looking for, and that was how Kevin Warsh would handle himself at that podium today. What did you make of it?

[00:00:23]>> Well, I think he did a good job. He brings credibility to the Fed. He mentioned multiple times that price stability of is of utmost important importance, but, you know, he's got some changes I think he wants to make. He's not a huge fan of the SAP SCP dots. He's not a huge fan of forward guidance. And I think what he's done is he's opened himself up for some time to pass as these consultant groups get together and and examine different things that the Fed looks at.

[00:00:49]>> Well, let's talk a little bit about the decision itself, and more importantly, the position right now that the Fed is in. In the past, you've talked about this idea that the Fed was kind of stuck on hold because of the situation in Iran and some of the longer-term inflationary pressures out there. Based on what we learned today, and I know the dot plot, at least given what Warsh said today, we probably have to take with a big grain of salt, but do you get this sense here that the Fed really can do anything over the next few meetings?

[00:01:16]>> I I think they can. It's unlikely they cut based on inflation pressures that are out there, but I think they're going to stay patient is is my guess. I think a little bit of overreaction on the two-year. I bet there was a lot of speculative longs thinking that he's going to be more dovish than he was, and you're going to get an unwind of that. I don't like to read too much into short-term price action in the bond market on the on Fed day. So, you know, I think the two-year is probably a little bit of a buy here. I wouldn't be surprised if you see that settle back down another 10 basis points or so, closer down to 4%.

[00:01:47]>> Yeah, we'll certainly have to see because right now 16 basis points higher on that two-year Treasury certainly turning a lot of heads here. So, you talk about patience on the part of policy makers. Let's talk a little bit more about the investment ramifications because I'm taking a look at, you know, some of the notes you sent over and I know you're preaching patience when it comes to the credit market. What does that mean now coming out of that decision, coming out of that statement and that presser? What does patient mean for you? Has it changed at all?

[00:02:18]>> Yeah, well, the patience is really been just based on valuations. The the risk on in the equity markets has been great for the credit markets. Credit spreads have tightened back into kind of their tights of the year. And so, valuations are tight. Credit curve is flat, meaning you don't get paid as much to go out the credit curve. So, as a as a credit investor, it's time to kind of be patient, really worry about bond selection and try to avoid potential hiccups coming down the pipeline.

[00:02:46]>> And you know, if we are in a situation where, you know, policy makers have to remain patients patient and we see rates basically stay around these levels when it comes to their benchmark rates.

[00:02:57]>> [snorts] >> What does that play look look like when it comes to bond markets more broadly here? When you think about not just corporate credit, but you think about, you know, securitized credits and some of those as well. You know, if we are in a sort of higher-ish rate environment for the foreseeable future, what does that mean for you?

[00:03:15]>> Well, higher but stable can be good for the the credit markets. You know, fundamentals are are still pretty strong. Earnings are are good. Housing market's kind of going sideways in price, but credit credit performance is strong. So, we can stay in this uncomfortably tight spread environment for some time. And so, higher for longer means floating rate securities can still offer attractive extra yield. The short-term securities kind of pricing off the two-year portion of the curve look interesting given how flat the curve is now. And so, I kind of like hugging the front end of the curve and the mix of floating and short-term fixed rate securities. Take some a little bit of credit risk, more investment grade credit risk, you can get paid still 100 150 basis points over those those treasury yields and that's, you know, five five and a half six 6% not too bad.

[00:04:04]>> I'm curious what you made of some of his commentary, limited commentary if you will, about the balance sheet and potentially the direction of where that goes.

[00:04:14]>> Well, they they mentioned that they're going to stay accommodative from a liquidity standpoint. So, I I I think they're going to still help the repo markets out. But, we we know that he's not a huge fan of running big balance sheets.

[00:04:27]Some people worried about a move on the balance sheet. I I I think he's you know, he's got his his consulting teams that need to to meet and talk about it. So, he's kind of biting his time and staying patient.

[00:04:37]But, I think it's something that'll probably be approached towards the towards the end of the year, especially if inflation starts making its way down.

[00:04:45]>> Yeah, to that point Chairman Warsh promising regime change announcing several different task forces here.

[00:04:52]Those five areas are communications, the balance sheets, the Fed's use and reliance on existing data sources, productivity and jobs as well as the central bank's inflation framework. So, it's interesting to see the creation of those task forces and you know, him taking the opportunity his first time at the podium to announce them. I'm curious of those different areas that the chairman said that they're going to be focusing on which do you think is most urgent? Which are you most interested to watch?

[00:05:23]>> I think the first one he's going to address is communication because he doesn't like as much forward guidance.

[00:05:28]So, I think he he kind of attacks that first.

[00:05:32]We'll probably see changes to the press conference. The the probably be shorter.

[00:05:36]I I feel it was already shorter this time than than Powell's usual conferences.

[00:05:41]And then I I got I think that that balance sheet's going to take a back burner for now.

[00:05:45]And that'll be towards the end of end of the year, I think.

[00:05:48]>> How comfortable are you with that, Ken, with regards to the potential of some sort of scale back in communication, at least as we've gotten to know it, let's just say since our Bernanke sort of brought these press conferences and everything on on to the world?

[00:06:02]>> Well, I think the the forward guidance was really important when we were doing QE because the Fed really wanted the the markets to to know that they're going to keep rates low and they're going to fight the deflationary forces, they're going to fight the slowing growth forces. But, with, you know, earnings where they are, unemployment low, we're we're not doing QE. I I just don't think there's the need for it anymore, and we should be more nimble. We shouldn't have to follow some dots that we laid out, you know, on a backwards-looking basis as the data changes. So, I think I think it's a step in the right direction.

[00:06:32]>> Yeah, absolutely. Those dots are probably the most anticipated and the most loathed of the Fed mechanisms out there, Ken. Sounds like from what we heard today that that might not be long for the world. Ken Shinoda, always a pleasure. DoubleLine Capital portfolio manager and his instant reaction there to the knee-jerk reaction in markets to the Fed decision and more importantly, the Fed communication, cuz that's really what this meeting was all about.