Up the Escalator, Down the Elevator - Title Image

Up the Escalator, Down the Elevator

An uptick in corporate defaults in 2019 will mark the beginning of a prolonged period of stress in the corporate bond market.

January 18, 2019


High-Yield and Bank Loan Outlook Report

First Quarter 2019

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

  • Market volatility will force the Federal Reserve to pause rate hikes in the first half of 2019 as an ongoing decline in equity prices, widening credit spreads, and tighter financial conditions foreshadow higher defaults in the next 12 months, but we believe it will resume tightening monetary policy later in the year.
  • We continue to believe that with real GDP growth running above potential, unemployment below full employment and falling, and core inflation near the 2 percent target, the 2019 data should be solid enough for the Fed to hike two times later in 2019.
  • Spread widening in the fourth quarter implies an increase in the 12-month trailing issuer-weighted high-yield default rate to 3.2 percent this year, from 1.8 percent currently. A lack of credit availability compared to recent years presents upside risk to this projection.
  • A Fed pause may support tighter credit spreads early in the year, but with investor confidence having been badly damaged, we believe 2019 will not be friendly to borrowers once the Fed resumes hiking interest rates.
  • Recent market volatility reminds us that risky asset returns typically follow an “up the escalator, down the elevator” motion—performance is slow and steady on the way up, but swift and steep on the way down, which supports a gradual de-risking as we have been recommending for several quarters.
 
 
Important Notices and Disclosures

This material is distributed 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 article 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 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. 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. 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. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.


FEATURED PERSPECTIVES

Amber Lights Flash at Davos - Featured Perspectives
January 24, 2019

Amber Lights Flash at Davos

Should the mood this year at Davos prove once again to be a contra-indicator, this may be the signal that the economy is likely to re-accelerate soon and that the party in risk assets continues.

Sometimes Meteors Strike the Earth - Featured Perspectives
December 27, 2018

Sometimes Meteors Strike the Earth

What would be a normal seasonal correction is turning into the worst December selloff in equities since the Great Depression.

Jogging to the Exits - Featured Perspectives
November 19, 2018

Jogging to the Exits

Preparing for the market turbulence that typically occurs in the run up to a recession.


VIDEO

Forecating the Next Recession 

Forecasting the Next Recession

Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”

Solving the Core Fixed-Income Conundrum 

Solving the Core Fixed-Income Conundrum

Anne Walsh, Chief Investment Officer for Fixed Income, shares insights on the fixed-income market and explains the Guggenheim approach to solving the Core Conundrum.







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