Bond managers see 2023 as stark contrast from carnage last year

DoubleLine's Jeff Sherman and BlackRock's Steve Laipply see many opportunities in the fixed-income market.

Compared to 2022, which was the worst year ever for bonds, fixed-income investors should be jumping for joy with all the opportunities ahead of them this year, according to veteran bond managers speaking at the Exchange ETF conference in Miami Tuesday.

“The ride was extremely rough to get to the place where we are now,” said Steve Laipply, U.S. head of fixed-income ETFs at BlackRock’s iShares. “However, this is now a tremendous opportunity as a bond investor.”

Laipply, who was joined in a panel discussion by Jeff Sherman, deputy chief investment officer at DoubleLine, said the current environment gives investors and bond managers a “chance to do a complete reset and take advantage of what the bond market is giving you.”

“We’ve retraced to a level where you can get yield without taking tremendous risk,” he added.

As the bond market adjusts to the Federal Reserve’s efforts to try and tamp down inflation by tightening rates aggressively, Laipply said the landscape is flush with opportunities for “retooling portfolios” across “active, passive and idiosyncratic fixed-income strategies.”

Sherman, who said that in the brutal bond market of 2022, “inflation has been the driver of everything,” remains perplexed over the evolving forecasts for a recession and is trying to manage portfolios for multiple scenarios.

“You have a very deeply inverted yield curve, which at these levels is a harbinger for recession,” he said. “That says Fed policy is way too tight, but it allows us to take active risk in credit. You should be betting on both outcomes: recession and no recession.”

Sherman cited a forecast showing 60% of economists expect a recession this year as among the anomalies he is navigating. “Then you look at the latest jobs numbers and start thinking, maybe this economy still has legs,” he said. “It’s not clear to me we’re going to have a recession this year.”

Regarding his own outlook, Sherman said he is trying to tune out the noise and think like a bond manager.

“I don’t have a strong enough conviction that we will have recession or we’ll make it through, but I do know math,” he said. “I want to own credit a little shorter because I’m concerned about a recession, and I also want something that can help me when bad things happen.”

In terms of opportunities, Sherman said, “The cheapest parts of the market are the ones that don’t have ETFs today, because investors can’t pile into those markets.”

Sherman added that not every corner of the global bond market needs to be represented by an ETF. “Does anyone care if you can have a high-yield energy bond ETF?” he said.

When it comes to fixed income, ETF innovation separates from the equity side, said Laipply

“Innovation will be a different lift and it’s hard, because all the easy stuff has been done,” he said. “You don’t want a situation where the market sells off and the ETF sells off far worse. I think more innovation will happen with granularity.”

If nothing else, bond fund managers got to go back to school during last year’s rout to refocus on some of the basics.

“I feel like I aged 10 years last year,” said Sherman. “I think last year was more carnage on managers than investors.” He recalled days of just trying to figure out what to sell.

Laipply agreed, describing 2022 as a “wake-up call about managing liquidity.”