Jeffrey Sherman and Jason Draho: How Should I Be Positioned? | UBS On-Air

Top-line view

Context / timing

• Recording date: April 9.
• Discussion framed around recent US–Iran hostilities and headline volatility; a ceasefire was announced the day before the recording.

Central takeaway

• Markets are treating the geopolitical shock mainly as an inflationary/supply shock (oil-driven) rather than an immediate growth/recession shock.
• Expected effects: short-term inflation higher, modestly slower growth, more complicated Fed timing — but recession is not the base case.

Assets, instruments and sectors mentioned

• Rates / fixed income: U.S. Treasuries (2y, 5y, 10y, 30y), TIPS, yield curve, break-even inflation spreads, duration.
• Credit: Investment Grade (IG) corporate bonds, High Yield (HY), BB-rated spreads, residential mortgages, commercial mortgage-backed securities (CMBS), asset-backed securities (ABS).
• Equities: S&P 500, software sector, AI-related equities.
• Commodities: oil (primary focus), aluminum, copper.
• Real assets / capex plays: data centers, commercial real estate (office), infrastructure related to AI capex.
• Other: macro indicators (CPI, PPI, unemployment, nonfarm payrolls), tariffs.

Key numbers, moves and timelines

• Rates (Feb 27 → early April): 2‑year yields up ~40–50 bps; 10‑year yields up ~45 bps.
• Equities: S&P 500 down ~4.5% at one point.
• Breakeven inflation: front-of-curve break-evens rose; 10y/30y break-evens have not meaningfully risen.
• Market-implied Fed pricing: swings from pricing hikes to pricing cuts (example: moved from ~50% chance of a hike earlier to ~30% chance of a cut by December on the referenced day).
• UBS CIO base case: two cuts this year, likely back-loaded (September and December), though cuts could be delayed.
• Fiscal: CBO cited a $1.05 trillion deficit in the first five months of the fiscal year; an annualized run rate discussed around ~$2.2 trillion.
• Credit spreads: IG spreads largely unchanged since late February (1 bp difference in the cited window); HY modestly wider but contained; BBs inside ~200 bps; HY inside ~300 bps.

Market / portfolio implications and positioning guidance

Rates positioning

• View: nominal-GDP decomposition — slightly lower real growth, slightly higher inflation (supply shock).
• Duration: favor front-end duration exposure (2y) and the 5y “belly” of the curve. Add duration if yields move a little higher.
• Curve: front end may come down more than the back end if oil moderates; the back end retains a premium due to fiscal concerns across developed markets.

Credit positioning

• Prefer shorter-duration credit and higher-quality bonds (easier to analyze, less spread sensitivity).
• Be cautious on lower-quality and structurally risky credits (examples: certain CMBS/ABS tied to office and data centers).
• Corporate credit overall looks fairly priced; distressed-yield names are being priced accordingly.
• Residential mortgage exposure seen as more attractive and less exposed to AI-related capex risks.

Equity / sector implications

• Software: recent stress reflects margin compression and repricing of expectations rather than wholesale obsolescence.
• AI: recommended exposure via equities rather than debt. Debt financing of AI capex (data centers, CMBS/ABS) raises questions about residual value and credit risk if deals or leases fail.

Tactical cautions

• Avoid short-term trading on geopolitics; expect episodic headline-driven volatility.
• Prefer credits with clear repayment/cash flow; avoid CRE and structured credit with uncertain residual values.
• Monitor front-of-curve inflation (breakevens) to distinguish supply-driven inflation from durable demand shocks.

Framework / methodology (paraphrased steps)

1. Start with market signals: examine the yield curve, break-even inflation spreads, and credit spreads to infer market expectations (nominal GDP = real growth + inflation).
2. Determine whether a shock is supply-driven (commodity-driven) or demand-driven via front vs. long-end break-evens and curve moves.
3. Position duration by deciding whether the front end or back end is more attractive; 5y “belly” highlighted as attractive.
4. Favor shorter-duration, higher-quality credit where coverage and payback horizons are short (12–24 months) rather than long structural bets.
5. Stress-test credit exposures for residual value and covenant strength (especially CMBS/ABS backed by data centers).
6. Use AI tools for speed (data scraping, reporting, modeling) but retain human oversight because models can hallucinate.

Views on monetary policy and Fed dynamics

• UBS CIO base case: two cuts this year (September and December), but cuts could be delayed or removed depending on inflation and labor data.
• Fed will remain data-dependent; labor market dynamics are critical to timing.
• Incoming Fed leadership (e.g., Kevin Walsh referenced) is an unknown; consensus-building and Fed independence optics matter to markets.
• Political risk around Fed appointments can cause market stress; preserving Fed credibility is important.

AI and capex — financing and investment-process usage

• Large projected AI capex: corporate announcements projecting roughly $3–4 trillion in capex into 2030; some estimates suggest ~60% of certain capex was spent in Q1 (anecdotal).
• Financing: AI capex will be financed across equity, IG debt, CMBS/ABS and other debt markets; bond market willingness to finance will condition outcomes.
• Practical stance: preference to take AI exposure via equities rather than speculative infrastructure debt; avoid owning CMBS/ABS where residual value is uncertain.
• In the investment process, AI/ML is mainly used for:
  • Data scraping (earnings reports, filings).
  • Drafting/research assistance and coding automation.
  • Rapid prototyping of spreadsheets and models.
  • Caution: models can hallucinate and require human review.

Explicit recommendations and cautions

Tactical recommendations

• Consider adding short-to-intermediate duration exposure (front end and 5y belly) if yields move higher.
• Favor higher-quality, shorter-duration credit (residential mortgages, short IG).
• Invest in AI primarily through equities rather than structurally risky debt tied to AI infrastructure.

Cautions

• Geopolitical headlines (Middle East) create episodic volatility and are inflationary via oil — be cautious on growth assumptions.
• Avoid speculative CMBS/ABS and long-duration credits with unclear residual values.
• Rapid growth in AI-related debt issuance could reveal market discernment if a hiccup (deal or lease failure) occurs.

Performance / risk metrics referenced

• Spread levels: IG spreads ~flat vs. late February; HY slightly wider; BB <200 bps; HY <300 bps.
• Yield moves: 2y +~40–50 bps; 10y +~45 bps in the cited window.
• Equity drawdown example: S&P ~‑4.5% around the shock window.

Disclosures / disclaimers

UBS Chief Investment Office’s views are prepared by UBS Global Wealth Management/affiliates. Views expressed by external guests are those of the speaker and not UBS. Material is informational only and not tailored advice. UBS accepts no liability for reliance on it.

Presenters / sources

• Host: Dan Cassidy (UBS Market Moves podcast)
• Guests: Jeffrey Sherman — Deputy Chief Investment Officer & Portfolio Manager, DoubleLine Capital; Jason Draho — Head of Asset Allocation for the Americas, UBS Chief Investment Office (note: transcript contains minor name/typo inconsistencies, e.g., “Jason Djo”).
• Organizations referenced: DoubleLine Capital, UBS Chief Investment Office (CIO), Congressional Budget Office (CBO).