August 22, 2019
Guggenheim Fixed-Income Outlook: Looking Past the Liquidity-Driven Rally
NEW YORK – Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today provided its Third Quarter 2019 Fixed-Income Outlook, titled “Looking Past the Liquidity-Driven Rally.”
“To keep the expansion going the Fed has boxed itself in to deliver more rate cuts this year. This may drive a rally in risk assets based on the market’s perception that liquidity will be plentiful during this period of Fed easing,” explained Scott Minerd, Chairman of Guggenheim Investments and Global Chief Investment Officer. But he warned, “Complacency around liquidity fuels speculative behavior.”
Long-term investors need to listen for the rhyme of history. When the Fed similarly pivoted from tightening to easing in 1998 in response to the Asian financial crisis, the easy money inflated risk assets, most notably tech stocks. The tech boom drove the U.S. economy into overdrive, putting the Fed back in hiking mode less than a year later. The bubble burst: The Nasdaq collapsed about 80 percent peak to trough, and high-yield credit spreads widened by over 600 basis points as the tech bubble burst.
Similar factors are in play today, and Minerd stresses prudence. “We will take investing risks when we believe we are being adequately compensated for them, but now is not one of those times.”
With this quarter’s outlook, we also release timely and relevant video commentary from Portfolio Manager Adam Bloch, and Matt Bush, 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:
- We do not think the current rally in risk assets is sustainable. Earnings have weakened, and although some corporations have focused on de-leveraging, average leverage multiples for the index remain near historical highs.
- History shows that spreads tend to widen when the Fed is easing, not tighten.
- Our portfolios continue to prioritize capital preservation with a preference for asset categories that are credit-loss remote, including government guaranteed securities, senior collateralized loan obligations (CLOs), and non-Agency residential mortgage-backed securities.
- We continue to have a low weighting in investment-grade corporate bonds versus the benchmark, particularly further out the curve, which is consistent with our capital preservation strategy.
- In structured credit, investor demand for CLOs regained its footing in the second quarter of 2019, causing spreads to tighten and new issuance to match prior volume records. We expect our investment focus to remain on bespoke opportunities, middle-market CLOs, commercial asset-backed securities, and aircraft ABS.
- As the market is maturing for CRE-CLOs, we are seeing 2019 as a breakout year in terms of liquidity with more market-makers establishing themselves. Bid wanted in competition (BWIC) volumes have been steadily increasing, showing more signs of a healthy secondary market.
- There is now over $1 trillion in negative-yielding corporate debt globally, which is attracting non-U.S. investors to positive-yielding U.S. corporates. Just as credit spreads widened in Europe before the last round of quantitative easing (QE), so, too, credit spreads in the U.S. will likely widen before the Fed moves to restart QE, which ultimately may prove to be the impetus that pushes U.S. rates below zero.
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 $209 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 6.30.2019. The assets include leverage of $11.2bn 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 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.
One basis point is equal to 0.01 percent.
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