May 16, 2018
Guggenheim 2Q Fixed-Income Outlook: Preparing for Long-Awaited Choppier Markets
NEW YORK – Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today provided its Second Quarter 2018 Fixed-Income Outlook, “Positioned for Choppier Waters."
The complacent environment characterized by low volatility and a scarcity of bonds to buy is changing. The shift from quantitative easing to quantitative tightening took its toll in the first quarter of 2018 as rate, credit, and equity volatility all spiked. Guggenheim expects more of the same going forward and is preparing portfolios accordingly.
“Rising rates are at the heart of the market shakeup. In the first quarter, we observed that the cost of borrowing money was going up, and going up faster than the Federal Reserve had planned. At some point, it’s going to bite.” said Scott Minerd, Global CIO and Chairman of Investments. “As we approach the turn in the credit cycle, our portfolio managers have been shortening portfolio duration and opportunistically moving up in credit. We also believe maintaining a reasonable liquidity buffer is important as it may enable us to pick up undervalued credits in periods of market weakness.”
With this quarter’s outlook, we also release timely and relevant video commentary from Portfolio Manager Steve Brown, CFA, and Matt Bush, CFA, CBE, a director in the Macroeconomic and Investment Research Group.
Among the highlights in the 32-page report and video:
- With significant federal spending increases and tax cuts in the pipeline, the economy will grow well above potential in 2018 and 2019. The good news is that this will support corporate earnings in the near term. The bad news is that this is how business cycles end.
- We have reduced our allocation to corporate bonds—including investment grade, high yield and bank loans—to less than half what it was at the beginning of 2017.
- Within structured credit, collateralized loan obligations (CLOs) remained the largest-weighted category with an increasing percentage in the most senior AAA-rated tranche.
- We are increasingly looking to Agency sectors to minimize potential downside in a spread-widening environment.
- We expect the unemployment rate to fall to 3.5 percent or lower—a full percentage point or more below its estimated natural rate—before the cycle ends.
- We expect the Fed to deliver three more rate hikes in 2018 and another four in 2019 as it attempts to engineer a soft landing. However, history suggests the odds of success are low.
- We continue to forecast that a recession will begin around early 2020, when a fading fiscal impulse collides with tight monetary policy and an overextended economy.
For more information, please visit https://www.guggenheiminvestments.com.
About Guggenheim Investments
Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with more than $246 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 3.31.2018 and include leverage of $12.2bn. In April 2018, Guggenheim Investments closed the sale of the firm’s Exchange Traded Fund (“ETF”) business representing $38.6bn in assets under management, which will be reflected in the June 30, 2018 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, Guggenheim Real Estate, 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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