Risk and Reward of Successful 'Mid-Cycle' Rate Cuts - Title Image

Risk and Reward of Successful 'Mid-Cycle' Rate Cuts

In all likelihood, the Fed has successfully staved off recession, but current spreads reflect just how little upside there is in credit.

December 23, 2019


Fixed Income Outlook video

Brian Smedley and Adam Bloch share insights from the Fourth Quarter Fixed-Income Outlook


Fixed-Income Outlook

Fourth Quarter 2019

Here are the key takeaways from our latest Fixed-Income Outlook report:

  • 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.
Important Notices and Disclosures

One basis point is equal to 0.01 percent.

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.

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 or speaker, but not necessarily those of Guggenheim Partners 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. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. Past performance is not indicative of future results.

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. This material is intended to inform you of services available through Guggenheim Investments’ affiliate businesses.

© 2019 Guggenheim Partners, LLC. All rights reserved. Guggenheim, Guggenheim Partners and Innovative Solutions. Enduring Values. are registered trademarks of Guggenheim Capital, LLC.


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