NEW YORK, NY — Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today provided its First Quarter 2021 Fixed-Income Outlook, titled “Staying on Offense.”
Even as credit spreads have narrowed considerably off their widest levels, further value remains as the global search for yield motivates investors to allocate to selected investment grade and high-yield corporate bonds, and structured credit.
The U.S. government has a much heavier hand in controlling the economy, either via the Federal Reserve (Fed) or direct White House and congressional intervention. “We spend a great deal of time analyzing the impact of these changes and how they may affect default risk in corporate credit and asset allocation more broadly,” said Scott Minerd, Chairman of Investments and Global Chief Investment Officer. “It will be easy to be lulled to sleep as markets rise with the distribution of a vaccine and the tailwind of policymakers’ response to economic challenges.”
“Even with these risks,” Minerd continued, “we may be entering what I have called a golden age for credit. Economic growth in 2021 will likely far exceed potential, which should boost corporate earnings.”
In the 32-page report, Guggenheim’s investment management team presents a sector-by-sector outlook on relative value, opportunity, and risk. Among the highlights:
- Additional fiscal stimulus, healthy consumer balance sheets, and accommodative Fed policy have created a constructive macroeconomic backdrop for risk assets.
- The Fed will no longer aim to cool an overheated labor market but will instead strive to overshoot the 2 percent inflation target in order to compensate for past periods of below-target inflation. While headline inflation is certain to rise in coming months due to sizable base effects, policymakers' focus is on the much weaker underlying inflation trend in place.
- We see a constructive near-term backdrop for credit markets as deeply negative real interest rates and low FX hedging costs will spur a reach for yield. A key risk to our bullish view on credit is the emergence of several new strains of COVID-19.
- As investment-grade corporate spreads currently sit near decade tights, and with much good news priced in, we expect credit spreads to trade in a narrow range.
- We are sanguine on below investment-grade opportunities in corporate bonds and loans due to improving economic data and accommodative monetary policy globally. Since prices bottomed in March, we have opportunistically added exposure to the asset class.
- High yield corporates, which experienced greater credit stress from COVID-driven shutdowns, should continue to benefit as the economy reopens.
- Within structured credit, we have found compelling risk-adjusted profiles in financial ABS, aircraft sale-leaseback transactions, and subordinated CLO debt investments.
- As the virus continues to infect commercial real estate, we are closely monitoring COVID-19’s impact on cash flows and resulting effects on property values in 2021.
- As long-term yields have reached the value zone, a market or overweight position may very well prove to be the low-risk choice.
- In rates, we believe the Fed’s policy of flexible average inflation targeting will translate into a longer period of short-term rates at zero than the market is currently pricing in, benefiting the front end and belly of the yield curve.
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About Guggenheim Investments
Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with more than $246 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 300+ 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.
1Guggenheim Investments assets under management are as of 12.31.2020. The assets include leverage of $13.7bn in 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 Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.
The potential impacts of the COVID-19 outbreak are increasingly uncertain, difficult to assess and impossible to predict, and may result in significant losses. Any adverse event could materially and negatively impact the value and performance of our strategies and their ability to achieve investment objectives.
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.
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