Global CIO Commentary by Scott Minerd
“Given our current position on the credit cycle, below investment grade bonds and structured credit are great places to be. Default rates remain low during periods of high accommodation from the Federal Reserve, such as the present one. What should investors be considering when they are selecting below investment grade securities and asset-backed securities? Floating rate assets are ideal because the coupons will rise with the eventual increase in interest rates that will occur when the Fed begins to tighten. Because we do not know when that will occur, a substantial allocation to floating rate assets can hedge the risk around this uncertainty.
Investors should also stay in relatively short duration fixed rate debt. For those who do not have this as an option, such as insurers or pension funds, I would encourage a barbell strategy. That way even if they are holding long duration assets, as interest rates move up, they can sell their short duration holdings at a modest profit or loss and reinvest in longer duration assets once rates have risen.”
Economic Data Releases
Hurricane Sandy Weighs on U.S. Economic Data, While the Housing Market Continues to Strengthen
Last week’s U.S. economic data releases were influenced by Hurricane Sandy. Industrial production fell 0.4% in October, the first monthly decline in two months. Regional manufacturing indices, including the Philadelphia Fed and New York Empire, both reported negative prints for November. The U.S. housing market continues to strengthen. October housing starts climbed to a four-year high of 894,000, with existing home sales rising for the third time in four months. Additionally, the NAHB Homebuilder Index rose to a six-year high of 46 in November, indicating further expansion in housing activities. The consumer price index rose 0.1% in October, the third consecutive month of increase. Despite this, near-term inflationary pressures should remain modest, with the capacity utilization rate having fallen to an eleven-month low of 77.8 in October.
The Eurozone Has Officially Entered a Recession
The eurozone officially entered into a recession in 3Q according to last week’s release of its latest GDP figures. Eurozone real GDP fell 0.1% in 3Q, the second consecutive quarter of decline. Economic activity in peripheral countries such as Italy, Spain, Portugal, and Cyprus continues to contract. Additionally, economic growth in Austria and Netherlands turned negative, and Germany and France posted sluggish real 3Q GDP growth. Italian industrial orders fell 4.0% MoM in September, the largest monthly decline in eight months. Consumer confidence in the Netherlands fell to the lowest level in six months. The eurozone consumer price index rose 0.2% in October and the region’s trade balance rose to a record high of €11.3 billion in September. In Asia, foreign direct investment in China fell 0.2% YoY in October, the smallest decline in five months. The Bank of Japan kept its benchmark interest rate and asset purchase program unchanged at its latest meeting.
Chart of the Week
Average Returns of Select Assets During Periods of Rising Interest Rates*
During periods of rising interest rates, floating rate credit products have historically outperformed fixed rate products. From 1985 through today, excluding the financial crisis from 2007-2009, U.S. credit products with floating rates delivered better average total returns during periods of rising interest rates than traditional fixed income products. Periods of rising interest rates are defined as whenever the cumulative increase in U.S. 3-month Libor rate is in excess of 100 basis points.
Source: Bank of America Merrill Lynch, Barclays, Credit Suisse, Guggenheim Investments. Data as of 10/31/2012. *Note: Periods start from 1985 to present and exclude the 2007 – 2008 financial crisis.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
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*Assets under management is as of 09.30.2019 and includes leverage of $11.8bn. 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. Securities offered through Guggenheim Funds Distributors, LLC, an affiliate of Guggenheim, SI, GFIA and GPIM.
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