Credit Returns in the Upcoming Fed Hiking Cycle

March 04, 2022

High-Yield and Bank Loan Outlook

First Quarter 2022

Here are the key takeaways from our latest High-Yield and Bank Loan Outlook report:

Given broadening price pressures in the economy, there is growing urgency for the Fed to begin a rate hiking cycle in 2022 and shrink the size of its balance sheet.
High yield and bank loan investors need not fear a Fed tightening cycle, since rate hikes typically occur when growth is strong and defaults are low.
Both sectors carry features that can support returns as the Fed is raising interest rates, namely spread compression in high-yield corporates and floating coupons in bank loans.
The floating-rate coupon on bank loans should rise in tandem with the general movement of short-term interest rates and cushion their performance.
We slightly favor bank loans primarily due to their low duration profile and wider discount margins that leave room for spread compression.

Important Notices and Disclosures

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This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC 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. 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.

Investing involves risk, including the possible loss of principal. The potential impacts of the COVID-19 outbreak are increasingly uncertain, difficult to assess and impossible to predict, and may result in significant losses. 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.

One basis point is equal to 0.01 percent.

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