March 07, 2019
Guggenheim 1Q Fixed-Income Outlook: Prepare for Challenging Late-Cycle Market Volatility
NEW YORK – Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today provided its First Quarter 2019 Fixed-Income Outlook, titled “Late-Cycle Drama Is Unfolding.”
In his prefatory note, Scott Minerd, Chairman of Guggenheim Investments and Global Chief Investment Officer, discussed the challenging environment that accompanies late-cycle monetary policy transitioning and market readjustments. “For now, we expect risk assets to enjoy another rally while the Federal Reserve stays on hold, but the pause will only prove to allow excesses we have highlighted before to become more pronounced.”
The consistent message from Guggenheim Investments’ sector teams in this quarter’s Fixed-Income Outlook is that the dramatic selloff in December reminds us of how quickly the market can turn as the business cycle ages. “The defensive positioning that we established in the third quarter of 2018 will enable us to avoid the volatility that characterizes late cycle market behavior and give us the opportunity to pick up undervalued assets when others are being forced to sell,” Minerd said.
With this quarter’s outlook, we also release timely and relevant video commentary from Portfolio Manager Adam Bloch, and Matt Bush, CFA, CBE, a Director in the Macroeconomic and Investment Research Group.
In the 32-page report and video, the investment management team presents a sector-by-sector outlook on relative value, opportunity, and risk. Among the highlights:
- All strategies pared back exposure to credit sectors, including CLOs, non-Agency RMBS, and other ABS, with proceeds going toward government-guaranteed sectors, and cash and cash equivalents. As a result, portfolio credit quality further increased and spread duration was further reduced over the quarter.
- We believe that the Fed will pause rate increases in the first half of 2019, with the risk that this pause could last longer. Additionally, the possibility of a rate cut cannot be ruled out. Further weakness in global economic growth may spill into the U.S. economy, which could spur the Fed to react.
- The Fed pause is supportive of a rally across risk assets in the near term, but it will also allow excesses to continue to build in the system. Many of the concerning trends previously discussed by our sector teams, including the potential for high downgrade volume in the investment-grade market and defaults in certain credit sectors, remain at the forefront of our long-term thinking.
- Within corporate credit, we will continue to move up in quality, as higher quality credits should better weather a cyclical downturn. Identifying strong and/or improving balance sheet stories will be key, as BBB financing costs have become elevated alongside wider corporate spreads.
- In high yield, while high-yield bond spreads have recovered some of the ground they lost in the fourth quarter, we caution against adding any duration risk. Though bond prices have rebounded in response to the Fed’s more dovish tone, the new issue market continues to struggle.
- In this environment where we believe credit spreads are not enough to compensate for risks, it is prudent to stay up in quality and maintain adequate liquidity to pick up undervalued credits during more opportune times.
- Sequential growth is likely to rebound in the second quarter, nevertheless growth is now on a downward trajectory in year-over-year terms, with growth weaker in 2019 than in 2018. Leading indicators confirm that the peak in growth is behind us, and our recession forecasting tools continue to point to a downturn starting by mid-2020.
- Our baseline forecast now envisions one more hike later in the year, with balance sheet runoff ending before year-end. Further rate hikes may be required in 2020 should inflation expectations begin to rise meaningfully.
For more information, please visit www.guggenheiminvestments.com.
About Guggenheim Investments
Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with more than $203 billion¹ in total assets across fixed income, equity, and alternative strategies. We focus on the return and risk needs of insurance companies, corporate and public pension funds, sovereign wealth funds, endowments and foundations, consultants, wealth managers, and high-net-worth investors. Our 300+ investment professionals perform rigorous research to understand market trends and identify undervalued opportunities in areas that are often complex and underfollowed. This approach to investment management has enabled us to deliver innovative strategies providing diversification opportunities and attractive long-term results.
1Guggenheim Investments assets under management are as of 12.31.2018. The assets include leverage of $12.4bn for assets under management. 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.
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 value 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.
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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.