DoubleLine's Jeffrey Sherman on the Fed's TACO Trade & Fixed Income Strategy

• Sherman cited the 'TACO trade' belief that the Fed will 'chicken out' and cut rates, but emphasized the Fed needs genuine labor market weakness first, which has not materialized despite recent tepid jobs reports.
• He identified a specific threshold of 5.002% for the 10-year Treasury, requiring oil prices to reach approximately $120 (2022 cycle highs) and remain elevated for a sustained period.
• Sherman warned of liquidity mismatches in private credit interval funds and BDCs, where redemptions force managers to sell the best assets first, leaving remaining investors with the riskiest, most illiquid credits.

Summary: DoubleLine's Jeffrey Sherman on Fed Policy and Fixed Income Strategy

Jeffrey Sherman, Deputy CIO of DoubleLine, addressed the Federal Reserve's policy outlook and fixed income opportunities at a Las Vegas panel discussion moderated by Katie Greifeld.

Fed Policy and the "TACO Trade"

Sherman challenged market expectations of imminent Fed rate cuts, describing the prevalent "TACO trade" mentality—where investors believe the Fed Chair will "chicken out" and cut rates when markets experience pain. He emphasized that meaningful rate cuts require genuine labor market deterioration, which hasn't materialized despite tepid jobs reports. Unemployment claims and labor participation remain stable, suggesting the Fed will stay on hold longer than markets anticipate.

Inflation Drivers and Rate Outlook

Sherman identified three "regressive taxes" pressuring consumers: initial inflation, tariffs, and rising fuel prices. Oil emerged as the critical variable across asset classes. He provided a specific target of 5.002% for the 10-year Treasury, achievable only if oil prices surge toward $120 per barrel (2022 cycle highs) and remain elevated.

Private Credit Concerns

Sherman expressed significant concern about liquidity mismatches in private credit products, particularly interval funds and BDCs marketed to retail investors. He warned that redemption pressure forces managers to sell quality assets first, leaving remaining investors with the riskiest, most illiquid holdings. He explicitly stated private credit "absolutely does not belong in an ETF structure."

Investment Recommendations

For advisors, Sherman recommends:

• Low-duration and ultra-short categories for quality without rate sensitivity
• Five-to-seven-year Treasuries (the curve's "belly") for balance
• Emerging market local currency bonds (yielding ~7%) as diversifiers
• Avoiding AI-related bond exposure due to skewed risk profiles and limited price discovery in loan and ABS markets