Despite early signs of deterioration in credit fundamentals, investment-grade credit spreads should continue to be supported over the third quarter by strong technicals, lack of volatility, and historically attractive all-in yields. Primary supply technicals remain favorable. While there continues to be a dearth in long duration and bank issuance, we expect banks to pick up the pace in the third quarter, but issuance of longer duration securities is likely to remain muted.
The traditional investor base for investment-grade corporates has been underweight versus the benchmark due to defensive positioning, but positive mutual fund inflows into high-grade funds should help keep spreads rangebound throughout the third quarter. The yield on the Bloomberg U.S. Investment Grade Corporate Index was hovering just above 5.5 percent in mid-July, which is in the 98th percentile over the last 10 years. We believe this relatively higher yield offers plenty of insulation from a total return perspective: Spreads would need to widen or rates increase by a combined 78 basis points in order to generate a loss over a one-year time horizon. But sectors such as money market funds and short-term Treasurys and Agencies are attractive alternative investments in the 4.75–5 percent yield range, which is likely to prevent investment-grade spreads from tightening materially from current levels.
Second quarter earnings show weakening credit fundamentals, as margins continue to compress and interest coverage trends lower as funding costs have risen. That said, the decline has been measured and these indicators are generally still above pre-COVID levels, but we expect this trend to continue and possibly accelerate into year-end.
Despite the 10s/30s credit curve continuing to flatten on a yield basis, we still see value in long duration securities. The supply technicals and natural buyer base for 30-year paper should continue to support the market throughout the third quarter. We remain cautious about adding to preferred and junior subordinated securities in the secondary market until further clarity around bank regulatory capital is finalized. However, we believe there are certain attractive investments in the asset class with higher current coupon and/or higher reset spread securities, which offer less downside risk. As we enter the summer slowdown, we believe more focus should be on liquidity and diversification.
This material is distributed or presented 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 material 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 authors, 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. 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 mortgage-backed securities and 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.
Guggenheim Investments represents the following affiliated investment management businesses: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.
©2023, Guggenheim Partners, LLC. All Rights Reserved. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Guggenheim Partners, LLC.
GPIM 58504
©
Guggenheim Investments. All rights reserved.
*Assets under management is as of 3.31.2024 and includes leverage of $14.5bn. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, and GS GAMMA Advisors, LLC.