/institutional/perspectives/sector-views/rates-sea-change
Rates: Sea Change
The Fed’s policy pivot sets the stage for attractive opportunities in higher-quality rates products.
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.
FOMC's "Dot Plot" Shows No Expectation of Another Rate Hike
Average Number of Rate Increases Forecasted by FOMC Participants
The Fed has left rates unchanged at every FOMC meeting thus far in 2019. The average number of hikes projected by FOMC participants is now below one for both 2019 and 2020 based on the March 2019 Summary of Economic Projections, which underscores the Fed’s intention to remain on hold.
Source: Guggenheim Investments, Federal Reserve. Latest data from the FOMC's March 2019 Summary of Economic Projections.
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.
An Inverted Yield Curve Has Historically Been a Precursor to Recession
Three-Month/10-Year Treasury Yield Curve
In reaction to the removal of the Fed's hiking bias and plans to end its balance sheet runoff earlier than expected, the three-month/10-year Treasury yield curve inverted, historically a precursor to a recession.
Source: Guggenheim Investments, Bloomberg. Data as of 6.12.2019.
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.
VIDEOS AND PODCASTS
Maria Giraldo, CFA, Managing Director, Investment Research, and Evan Serdensky, Director, Portfolio Management, provide our macro and markets outlook.
Brian Smedley, Guggenheim’s Chief Economist and Head of Macroeconomic and Investment Research, discusses the impact of the Fed’s 0.75% rate hike on markets and the economy.
©
Guggenheim Investments. All rights reserved.
*Assets under management is as of 03.31.2022 and includes leverage of $20.0bn. 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 Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Fund Management (Europe) Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.
By choosing an option below, the next time you return to the site, your home page will automatically
be set to this site. You can change your preference at any time.
We have saved your site preference as
Institutional Investors. To change this, update your
preferences.
United States Important Legal Information
By confirming below that you are an Institutional Investor, you will gain access to information on this website (the “Website”) that is intended exclusively for Institutional Investors and, as such, the information should not be relied upon by individual investors. This Website and any product, content, information, tools or services provided or available through the Website (collectively, the “Services”) are provided to Institutional Investors for informational purposes only and do not constitute a recommendation to buy or sell any security or fund interest. Nothing on the Website shall be considered a solicitation for the offering of any investment product or service to any person in any jurisdiction where such solicitation or offering may not lawfully be made. By accessing this Website, you expressly acknowledge and agree that the Website and the Services provided on or through the Website are provided on an as is/as available basis, and except as partnered by law, neither Guggenheim Investments and it parents, subsidiaries and affiliates nor any third party has any responsibility to maintain the website or the Services offered on or through the Website or to supply corrections or updates for the same. You understand that the information provided on this Website is not intended to provide, and should not be relied upon for, tax, legal, accounting or investment advice. You also agree that the terms provided herein with respect to the access and use of the Website are supplemental to and shall not void or modify the Terms of Use in effect for the Website. The information on this Website is solely intended for use by Institutional Investors as defined below: banks, savings and loan associations, insurance companies, and registered investment companies; registered investment advisers; individual investors and other entities with total assets of at least $50 million; governmental entities; employee benefit (retirement) plans, or multiple employee benefit plans offered to employees of the same employer, that in the aggregate have at least 100 participants, but does not include any participant of such plans; member firms or registered person of such a member; or person(s) acting solely on behalf of any such Institutional Investor.
By clicking the "I confirm" information link the user agrees that: “I have read the terms detailed and confirm that I am an Institutional Investor and that I wish to proceed.”