Persistent job strength and stubbornly high core inflation data have prompted significant revisions to interest rate hike expectations by market participants and given the Fed little reason to deviate from its hawkish policy. Market expectations for another 175 basis points of tightening in this cycle were realized in November with the fourth consecutive 75 basis point hike, bringing the fed funds rate from a range of 3–3.25 percent to 3.75–4 percent. However, the impact on the economy of the 375 basis points in tightening that the Fed has already delivered is beginning to be felt in the economy, with the Fed noting in its statement that, “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy.” This leads us to believe that there is a good chance that the Fed will downshift the pace of tightening in December.
The decrease in Treasury market liquidity and increase in market volatility has compounded the impact of the sharp increase in the fed funds rate this year. Liquidity has remained challenging amid the continued global tightening cycle, due in part to the lack of Fed purchases of Treasurys and the decrease in participation by foreign investors, exacerbating price swings. All told, the resulting increase in Treasury yields drove the Treasury index down 4.3 percent for the third quarter, and down 13.1 percent year to date. These returns are the worst seen in at least 50 years, and have made for a very difficult year for fixed-income investors.
Despite the challenging environment, several compelling investment opportunities are materializing in the government sector. With long-end Treasury yields hovering around 4 percent and a terminal fed funds rate near 5 percent already priced in, we believe this is an opportune time to consider adding duration at these levels. As recession risk rises with more deterioration in economic data, longer dated bonds stand to benefit as the market pivots from pricing in rate hikes to pricing in rate cuts. Additionally, low coupon, callable Agency bonds with maturities in the 15- to 20-year range offer spread pickup to similar maturity current coupon bullet securities and offer attractive total return potential due to their discounted price.
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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. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-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 risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk.
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*Assets under management is as of 6.30.2023 and includes leverage of $15.9bn. 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 Advisors, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.