Credit markets are supported by a bright near-term economic outlook, but prudent investors must look past melt-up conditions to maintain the discipline required for long-term success
NEW YORK – Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today provided its Fourth Quarter 2017 Fixed-Income Outlook, “A Tight Market Gets Tighter.”
The report reflects the investment management team’s view that investors are not being compensated for risks they are taking. Virtually every piece of data released is associated with a solid economy that is expected to strengthen from the surge in post-hurricane rebuilding, seasonal tailwinds, and possible tax cuts. At the same time, the Federal Reserve (Fed) is ratcheting rates higher and normalizing its balance sheet, and spreads in most fixed-income sectors are moving to historical tights and below investment-grade yields are likely to breach historical lows.
“As investors, we thoughtfully plan for long-run outcomes based on expected changes in the economy, but transitory events can have powerful effects in the short run,” said Scott Minerd, Global CIO and Chairman of Investments. “The challenge is to avoid chasing short-term gains and maintain the discipline required for long-term investing success.”
With this quarter’s outlook, we also release timely and relevant video commentary from Portfolio Manager Steve Brown, and Maria Giraldo, Director in the Macroeconomic and Investment Research Group.
Among the highlights in the 32-page report and video:
- We have continued to reduce allocations and spread duration in sectors in which we think spreads are insufficient to compensate for the growing risk of a recession, which we believe is likely to occur by the end of 2019, possibly 2020.
- High-yield corporate bonds look particularly overvalued. Our research indicates that BB-rated and B-rated spreads have only been tighter 6 percent and 12 percent of the time, respectively. Our allocation to high-yield corporate bonds across both our Core and Multi Credit strategies remains the lowest on record.
- In high yield, investors will find that if they loss-adjust yields using recessionary default assumptions they would generate returns that are no better than a Treasury security.
- The collateralized loan obligation (CLO) credit curve is flattening—there is now less than 100-basis-point difference between AAA-rated and A-rated CLOs—so going further down the capital structure below the AA-rated tranche offers little compensation.
- We expect the Fed to resume a quarterly pattern of rate increases in December, continuing until late-2019, as unemployment and inflation on a net basis are likely to overshoot the Fed’s dual mandate objectives. The appointment of Jerome Powell as Fed Chair does not change our bear-flattening view, as he is likely to continue current policy direction.
About Guggenheim Investments
Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with $243 billion1 in 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 275+ 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 and attractive long-term results.
1Guggenheim Investments total asset figure is as of 9.30.2017. The assets include $11.6bn of leverage for assets under management and $0.4bn for assets for which Guggenheim provides administrative services. Guggenheim Investments represents the following affiliated investment management businesses: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Real Estate, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management.
Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Investments in bank loans securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk.
This information herein is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This material contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author's opinions 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. ©2017, Guggenheim Partners, LLC. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.