A severe recession is on the horizon - and the Fed will axe interest rates to limit the fallout, DoubleLine's chief investor says
The US economy will suffer a severe recession, spurring the Federal Reserve to slash interest rates by a whole percentage point at once, DoubleLine Capital's chief investment officer says.
"A multitude of economic indicators we look at are flashing either warning or recessionary signals," Jeffrey Sherman, a reliable predictor of past recessions. Short-dated US Treasuries are currently paying higher yields than long-dated ones, signaling investors expect the Fed to cut rates in the next few years — which the central bank typically does during economic downturns.
"The bond market is telling the Fed that they've overtightened and they will have to cut rates," Sherman said. He predicted that policymakers would be slow to act, and eventually opt to reduce rates by 100 basis points in one go to pull the economy out of the doldrums. Sherman added that a recession was likely to hit in another 12 to 18 months, and disclosed that he's betting on long-dated government bonds. He's also purchased shorter-maturity, investment-grade corporate bonds as they offer sizeable yields, and he sees little risk of imminent defaults, he said.
However, Sherman noted an increasing percentage of companies are failing to repay their variable-rate loans, due to the Fed hiking borrowing costs from almost zero to over 5% since last spring. If that trend continues, it could indicate a recession is looming, he said.DoubleLine's billionaire CEO, Jeffrey Gundlach, has been
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