U.S. Treasuries regained demand from investors seeking safety, but the rally left longer-term fiscal concerns unresolved and DoubleLine cautious about long-dated bonds, the firm’s investor Jeffrey Sherman said.
The recovery followed a period when government bonds had offered less protection during market setbacks. Sherman attributed part of the rebound to a reversal of excessive selling rather than a change in economic conditions.
Sherman spoke on Bloomberg Television’s “Bloomberg Real Yield,” published Oct. 22. He linked renewed demand for Treasuries to changing views about artificial intelligence investment and stress in France.
“There has not been much change in fundamentals,” he said. Questions had instead emerged about the investment case for artificial intelligence and data centers.
French government bonds offered another possible explanation for the shift. Sherman said France’s 10-year yield had moved above the comparable U.S. yield, potentially making American debt more attractive to European investors.
Demand for safety could outweigh U.S. budget concerns in short-term trading. DoubleLine nevertheless continued to hold substantially less long-dated government debt than its portfolio benchmarks because it expected those fiscal problems eventually to affect borrowing costs.
Sherman said the Federal Reserve needed to raise interest rates, although he expected it to avoid surprising investors. Markets had not priced in increases over the next three to six months.
He distinguished those expectations from bond valuations. Investors could still find value in Treasuries if their yields already provided compensation for the possibility of tighter monetary policy.
Turning to debt issuance, Sherman expected Treasury Secretary Scott Bessent to favor selling fewer long-dated bonds and more short-dated securities. He gave no estimate for the size of any shift.
He said the Treasury’s bond buybacks retired securities carrying low interest payments but had little effect on the broader market for long-dated debt. A larger intervention would be needed to change that market.
Sherman also criticized Bessent’s approach to attracting buyers. “I don’t think he is doing a great job of salesman,” he said, arguing that investors needed greater confidence.
On congressional elections, Sherman said divided government could help limit further deficit expansion. He also identified a risk that Republicans might rush policies through Congress before losing control of a chamber.
The discussion then turned to who buys U.S. debt. Sherman considered attracting demand a bigger issue than hedge funds trading differences between bond futures and the securities themselves.
He said foreign demand had weakened as investors found comparable yields at home. Japanese government bonds could offer Japanese buyers better returns after the cost of protecting against currency movements.
Central banks’ purchases of gold had also diverted money that might otherwise have gone into dollar assets. Sherman described a structural change in demand but left open how persistent it would prove.
