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Guggenheim Fixed-Income Outlook: Risk and Reward of Successful ‘Mid-Cycle’ Rate Cuts

NEW YORK, Dec. 23, 2019 (GLOBE NEWSWIRE) -- Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today provided its Fourth Quarter 2019 Fixed-Income Outlook, titled “Risk and Reward of Successful ‘Mid-Cycle’ Rate Cuts.”

In July, after the Federal Reserve (Fed) made its first rate cut in a decade, Fed Chair Jerome Powell referred to the first cut as a brief “mid-cycle” rate adjustment, as opposed to the beginning of a lengthy cutting cycle. This distinction was critical, because it spoke to the Fed’s mixed track record of using rate cuts to stave off recession. The central bank had successfully staved off recession using a similar adjustment in 1998, but it was not effective in several other late cycle scenarios.

In all likelihood, Powell’s hopes have been realized and the Fed has successfully staved off recession and extended the expansion. Weakness in manufacturing data has bottomed out, the consumer is in good shape, and the labor market remains extraordinarily resilient. The recovery in the United States is also helping to drive a pickup in global economic activity.

“This is all good economic news, but the rhyming of history reminds us to consider how the 1998 scenario played out,” explained Scott Minerd, Chairman of Guggenheim Investments and Global Chief Investment Officer. “The Fed’s 1998 mid-cycle adjustment resulted in a liquidity-driven rally that caused the Nasdaq index to double within a year before the bubble finally burst. It also led to a significant widening of credit spreads. Today, current spreads reflect just how little upside there is in credit even as the expansion continues. By heeding the lessons of the past we continue to position defensively so that we can preserve capital and be prepared to take advantage of opportunities when asset prices inevitably reset.”

With this quarter’s outlook, we also release timely and relevant video commentary from Brian Smedley, Head of the Macroeconomic and Investment Research Group, and Portfolio Manager Adam Bloch.

In the 32-page report and video, the investment management team presents a sector-by-sector outlook on relative value, opportunity, and risk. Among the highlights:

  • Risks are building in various areas of the fixed-income credit markets, particularly in corporate credit. We continue to focus on income and capital preservation in a market where the risk/reward trade-off looks unattractive in many credit sectors..
  • It is clear there is far more downside risk than upside potential in credit. Currently, investment grade bonds stand at a spread of 96 basis points, just 23 basis points from their historical tights, and 514 basis points from their historical wides. The story is similar for high-yield bonds: They currently stand at a spread of 322 basis points over the Treasury curve, which is 105 basis points from their historical tights and 1,626 basis points from their historical wides.
  • Our primary portfolio allocation strategy has been to focus on loss-remote investments that will exhibit minimal spread volatility and stable returns under a variety of credit and rate environments.
  • We expect investment-grade corporate spreads to remain rangebound amid an abundance of caution. With investment-grade 10s/30s credit curves at the steeper end of the range and continued appetite from foreign and domestic buyers, we should see strong support for longer-dated, high-quality bonds.

  • In structured credit, we remain cautious on subordinated CLO investments.
  • In Agencies, market volatility will likely continue, creating opportunities to find attractive yields in longer lockout callable Agency debt and fixed-rate bullet Agency bonds.             

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About Guggenheim Investments

Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with more than $213 billion1 in total assets across fixed income, equity, and alternative strategies. We focus on the return and risk needs of insurance companies, corporate and public pension funds, sovereign wealth funds, endowments and foundations, consultants, wealth managers, and high-net-worth investors. Our 295+ investment professionals perform rigorous research to understand market trends and identify undervalued opportunities in areas that are often complex and underfollowed. This approach to investment management has enabled us to deliver innovative strategies providing diversification opportunities and attractive long-term results.

1. Guggenheim Investments assets under management are as of 9.30.2019. The assets include leverage of $11.8bn for assets under management. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.

Investing involves risk, including the possible loss of principal. Investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their values to decline.  High yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility.  Investors in asset-backed securities, including collateralized loan obligations (“CLOs”), generally receive payments that are part interest and part return of principal. These payments may vary based on the rate loans are repaid. Some asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. CLOs bear similar risks to investing in loans directly, such as credit, interest rate, counterparty, prepayment, liquidity, and valuation risks. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.

One basis point is equal to 0.01 percent.

This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.

Media Contact
Gerard Carney
Guggenheim Partners

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