Rates: Sea Change

This Rates sector report is excerpted from the Second Quarter 2019 Fixed-Income Outlook.

The first quarter of 2019 brought about a sea change in monetary policy direction from the Fed and overall capital market sentiment. Citing a weaker outlook for growth and contained inflation, the FOMC’s Summary of Economic Projections, or dot plot, showed no further plans to tighten policy in 2019 from the current fed funds target rate of 2.25–2.50 percent.

This marked a significant shift from its December meeting, at which most members had projected at least two hikes. Additionally, the Fed’s plans for balance sheet normalization indicated a sooner-than-expected end to the program. In reaction to these new developments, the three-month/10-year Treasury yield curve inverted, historically a precursor to a recession.

The Fed’s shift in tone drove a decline in U.S. Treasury yields of 20–30 basis points across the curve, generating another strong quarter of returns for the asset class. The U.S. Treasury market delivered a total return of 2.1 percent in the first quarter and the Agency market produced a total return of 1.8 percent. The move to lower yields was seen across global developed markets, and the Bloomberg Barclays Global Treasury index returned 1.6 percent in the first quarter.

With the Fed likely to remain on hold until the Fed receives a clearer sign that the rate change is necessary, we believe that Treasury yields are likely to remain below last year's peak and that high-quality, longer duration assets such as Agency bonds could perform well as investors reach for yield. Additionally, the inversion of the three-month/10-year Treasury yield curve, coupled with our view that the yield curve lacks catalysts to flatten materially from current levels, prompted us to move to a more neutral curve position by decreasing our long-end Treasury holdings and adding to our Treasury holdings at the short end and belly of the curve. With the relative steepness of the Treasury curve in the belly, we will be on the lookout for relative-value trading opportunities.

—Connie Fischer, Senior Managing Director; Kris Dorr, Managing Director; Tad Nygren, CFA, Managing Director

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.

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. 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.

©2019, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.

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