Finding Long-Term Value - Title Image

Finding Long-Term Value

Even as credit spreads have narrowed considerably from their widest levels, further value remains.

March 11, 2021


This Portfolio Management Outlook report is excerpted from the First Quarter 2021 Fixed-Income Outlook.

After navigating the pitfalls and taking advantage of the opportunities in 2020, we believe our strategies are well positioned for 2021. Additional fiscal stimulus, healthy consumer balance sheets, and accommodative Fed policy have created a constructive macroeconomic backdrop for risk assets. 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 investment grade and high-yield corporate bonds.

While Yields Have Fallen Considerably, Value Remains

Even as credit spreads have improved considerably off their widest levels, further value remains as the global search for yield has motivated investors to allocate to investment grade and high-yield corporate bonds. Within structured credit, we continue to favor senior tranches.

While Yields Have Fallen Considerably, Value Remains

Source: Guggenheim Investments, Credit Suisse, Bloomberg, Citi. Data as of 1.26.2021. Representative Indexes: Bank loans: Credit Suisse Leveraged Loan Index; High-Yield Corporate Bonds: Bloomberg Barclays U.S. High-Yield Corporate Index excluding energy; Investment-Grade Credit and A, BB Corporates: Bloomberg Barclays U.S. Corporate and A, BBB subsets; BB Corporates: Bloomberg Barclays U.S. High-Yield Index (BB subset); Agency RMBS: Bloomberg Barclays U.S. Aggregate Index (Agency RMBS subset); CLOs: J.P. Morgan CLOIE Index (A, AA, AAA, and BBB subsets), CMBS 2.0 AA: Bloomberg Barclays CMBS 2.0 Index (AA subset), Agency CMBS: U.S. Aggregate Index (Agency CMBS subset); Bloomberg Barclays Agg: Bloomberg Barclays U.S. Aggregate Index; Legacy Floating NA RMBS and fixed-rate aircraft are based on Guggenheim’s trading desk’s indicative levels.

With a few exceptions, structured credit spreads have largely recovered from the COVID downdraft. In particular, even as global air traffic remained curtailed as a result of the pandemic, the most senior tranches of aircraft ABS have rallied because of positive vaccine news and expectations for pent-up travel demand in the second half of 2021. More generally, the yield advantage of structured products, whose spreads generally react more slowly to market changes, continues to make the space attractive. We expect spreads to further compress into 2021 as investors take advantage of the higher carry offered in the asset class. Similarly, CLO spreads have rallied sharply. Senior loan prices rose, and prices across the CLO capital structure recovered, with the product thus far surviving another default wave unscathed. The new CLO creation pipeline is set to continue the strong pace experienced in the second half of 2020, which should further fuel demand for senior loans. Despite this supply pressure, CLO spreads will likely rally tighter as investors search for yield.

While spreads continue to compress, our fundamental and technical outlook for investment-grade corporates remains positive for the first quarter of 2021. While new supply is likely to abate from the historic levels of 2020, the demand for credit should remain strong. Relatively higher absolute yields of U.S. corporate bonds, even net of currency hedging costs, are still compelling for international investors. Additional fiscal stimulus and a dovish monetary policy stance further provide support for corporates. Although the Fed’s corporate bond purchase program was not extended past the end of 2020, the precedent it set has reassured investors that similar programs could be initiated in the future if needed.

Positions in non-Agency RMBS benefitted from resilient mortgage credit performance in recent months. While delinquencies are expected to remain elevated due to a challenging job market and continued COVID-19 disruptions, their impact is largely reflected in the current trading levels and other dynamics in the mortgage sector are very supportive. Rising home prices, low housing inventory and limited non-Agency supply paint a constructive picture for non-Agency RMBS assets.

We are also 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.

—Anne B. Walsh, JD, CFA, Chief Investment Officer, Fixed Income; Steve Brown, CFA, Portfolio Manager; Adam Bloch, Portfolio Manager

 
Important Notices and Disclosures

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. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.

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. Asset-backed securities, including mortgage-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 risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. 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.

©2021, Guggenheim Partners, LLC. 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.


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