A Turn in the Credit Cycle

Investors should understand the recent transition in the credit market and the implications it could have for the trajectory of asset prices over the long-term.

November 27, 2012

Global CIO Commentary by Scott Minerd

“Credit spreads keep ratcheting down as the bull market in credit continues. Bull markets typically have three legs. The first is what I call disbelief, which is what we went through in March 2009. This is when assets are so depressed from widespread liquidation that when selling pressure eases, prices rise. The next leg is the fundamental leg when improving fundamentals, such as falling default rates and lower inflation, drive the appreciation in prices. The third leg is a period of overvaluation. This stage often runs further and lasts longer than investors expect.

The high yield bond market appears to be moving from the fundamental leg to the overvalued leg. A greater portion of investment activity in the high yield market is now based on investors simply wanting to own the asset class. As a result, it has become harder to find the same level of value previously experienced in the below-investment grade market. While there is still a fair amount of room for spreads to tighten further, investors should be aware of the shift in the environment and adjust investment decisions accordingly.”

Economic Data Releases

U.S. Consumer Sentiment is Rising on Moderately Better Economic Data as We Enter the Holiday Season

Total sales from the four-day Thanksgiving holiday weekend were 17% higher than a year ago, a positive sign of consumer sentiment as we enter the holiday season. U.S. consumer confidence edged up to 73.7 in November, a four-year high. Regional sentiment indices were mixed, with the Richmond Fed rising above zero but the Philly Fed and Empire Manufacturing indices both remaining below the level that signals contraction. On the back of positive housing data last week, the FHFA home price index rose again in September by 0.2% following an increase of 0.5% in August. Durable and capital goods orders also reported better than expected results for October. Durable goods orders were flat for October, which was better than expected. Capital goods orders excluding aircraft climbed 1.7%, far exceeding expectations.

Manufacturing in Europe Appears to be Stabilizing Despite Worsening Consumer Sentiment

A number of Manufacturing PMI Indicators across Europe seem to suggest the slowdown in industrial activity may be beginning to stabilize. The Eurozone PMI composite edged up in November to 45.8 from 45.7 in October. Manufacturing PMIs for both Germany and France increased in November. The IFO Business Climate index for Germany also rose to 101.4 in November, the first increase in eight months. However, consumer sentiment in Europe has worsened with consumer confidence in Germany falling to 5.9, the lowest level since August. Consumer confidence in Italy fell to 84.8, the lowest level since data became available in 1996. Industrial activity turned positive in Asia, where China’s HSBC Manufacturing PMI rose to 50.4 in November, the first expansion in 13 months. Additionally, Singapore’s industrial production rose 3.3% in October, the fastest growth rate since June 2012.

Chart of the Week

High Yield Debt Issuance by Use of Proceeds

Strong primary issue demand and low nominal rates have driven the high level of recent debt refinancings. Since 2010, over $450 billion in bank loans and high yield bonds have been refinanced. While there has been nearly $750 billion in bond issuance over the last three years, 60 percent has been used to refinance existing debt. Net new supply has been minimal with the high yield market growing only 16 percent since 2010.

High Yield Debt Issuance by Use of Proceeds


September 17, 2019

Forecasting the Next Recession: Will Rate Cuts Be Enough?

History shows that once our recession forecast model reaches current levels, aggressive policy can delay recession, but not avoid it.

August 22, 2019

Looking Past the Liquidity-Driven Rally

Credit spreads could get tighter in this liquidity-driven rally, but history has shown that the potential for widening from here is much greater.

July 29, 2019

The Fed's Sugar High

Rational immigration policy, not rate cuts, is the way to avoid recession.


Third Quarter 2019 Fixed-Income Outlook 

Third Quarter 2019 Fixed-Income Outlook

Portfolio Manager Adam Bloch and Matt Bush, a Director in the Macroeconomic and Investment Research Group, share insights from the third quarter 2019 Fixed-Income Outlook.

Core Fixed-Income Conundrum 

Solving the Core Conundrum

Anne Walsh, Chief Investment Officer for Fixed Income, shares insights on the fixed-income market and explains the Guggenheim approach to solving the Core Conundrum.

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