October 09, 2013 | By Scott Minerd
After its September Federal Open Market Committee Meeting, the U.S. Federal Reserve made it clear that any reduction in its program of quantitative easing (QE) is unlikely in the near-term. Since then, Washington battles over the budget and the debt ceiling have confirmed our view that QE will continue until at least the first quarter of 2014. Washington gridlock will affect near-term growth and should be good for bonds because lower fourth quarter GDP leaves room for interest rates to fall. Lower interest rates have already reignited the search for yield and are changing the dynamics in the below-investment grade market. Mutual fund investors, no longer faced with the prospect of rising rates, may start thinking about leaving floating-rate funds in search of higher returns from high yield bonds. These developments are positive for below-investment-grade bonds and make this a good time to consider increasing exposure where appropriate. So far this year, flows into bank loans have been consistently positive, as has performance. However, our latest High Yield and Bank Loan Outlook report reveals that high yield bond fund flows have been volatile, and performance has been uneven. Now that the risk of a near-term increase in interest rates has faded, we expect to see more stability in high-yield flows and more volatility in bank loans as mutual fund investors reposition to search for yield rather than protecting themselves from rising rates. Despite the volatility experienced in the third quarter, our research shows that default rates for below-investment-grade bonds typically remain low for some time following periods of monetary accommodation. The Fed has indicated interest rates will remain near zero at least until mid-2015, and we expect rates to stay low even longer. The take-away for investors in the below-investment grade market is that the fourth quarter outlook appears positive, and more positive for high yield bonds than bank loans.
Speculation on the future of quantitative easing may keep volatility elevated during the fourth quarter, but fundamentals in the corporate credit market remain solid. With borrowers having locked in lower borrowing costs over the next few years and short-term rates expected to remain low at least until mid-2015, concerns that high-yield borrowers may not be able to meet their obligations are mostly muted for now. Data since 1986 shows that periods of monetary accommodation have typically been followed by prolonged periods of low default rates.
Source: Credit Suisse. Data as of September 30, 2013.
This article 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 article 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. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2014, Guggenheim Partners. 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.
Our positive 2021 economic outlook, combined with better-than-expected company fundamentals, supports strong credit performance and spreads.
The relative calm we feel in the markets right now isn’t the end of the storm, it is just the eye.
Cooperation and understanding between China and United States is vital as global economic and environmental challenges mount.
Brian Smedley, Head of Macroeconomic and Investment Research, and Portfolio Manager Steve Brown share their outlook for the third quarter 2020.
Scott Minerd, Chairman of Investments and Global CIO, discussed his outlook for markets and the economy with CNBC’s Brian Sullivan during the Milken Institute 2020 Global Conference.
You are now leaving this website.Guggenheim assumes no responsibility of the content or its accuracy.
Your browser does not support iframes.
2021 Guggenheim Partners, LLC. All rights reserved. Guggenheim, Guggenheim Partners and Innovative Solutions. Enduring Values. are registered trademarks of Guggenheim Capital, LLC.