Global CIO Commentary by Scott Minerd
After its September Federal Open Market Committee Meeting, the U.S. Federal Reserve made it clear that any reduction in its program of quantitative easing (QE) is unlikely in the near-term. Since then, Washington battles over the budget and the debt ceiling have confirmed our view that QE will continue until at least the first quarter of 2014. Washington gridlock will affect near-term growth and should be good for bonds because lower fourth quarter GDP leaves room for interest rates to fall. Lower interest rates have already reignited the search for yield and are changing the dynamics in the below-investment grade market. Mutual fund investors, no longer faced with the prospect of rising rates, may start thinking about leaving floating-rate funds in search of higher returns from high yield bonds. These developments are positive for below-investment-grade bonds and make this a good time to consider increasing exposure where appropriate. So far this year, flows into bank loans have been consistently positive, as has performance. However, our latest High Yield and Bank Loan Outlook report reveals that high yield bond fund flows have been volatile, and performance has been uneven. Now that the risk of a near-term increase in interest rates has faded, we expect to see more stability in high-yield flows and more volatility in bank loans as mutual fund investors reposition to search for yield rather than protecting themselves from rising rates. Despite the volatility experienced in the third quarter, our research shows that default rates for below-investment-grade bonds typically remain low for some time following periods of monetary accommodation. The Fed has indicated interest rates will remain near zero at least until mid-2015, and we expect rates to stay low even longer. The take-away for investors in the below-investment grade market is that the fourth quarter outlook appears positive, and more positive for high yield bonds than bank loans.
Default Rate Trends Following Periods of Monetary Accommodation
Speculation on the future of quantitative easing may keep volatility elevated during the fourth quarter, but fundamentals in the corporate credit market remain solid. With borrowers having locked in lower borrowing costs over the next few years and short-term rates expected to remain low at least until mid-2015, concerns that high-yield borrowers may not be able to meet their obligations are mostly muted for now. Data since 1986 shows that periods of monetary accommodation have typically been followed by prolonged periods of low default rates.
FEDERAL FUNDS TARGET RATE VS. 2-YEAR FORWARD HIGH YIELD DEFAULT RATE
Source: Credit Suisse. Data as of September 30, 2013.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.
Investing involves risk, including the possible loss of principal.
*Assets under management is as of 09.30.2022 and includes leverage of $17.0bn. 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 Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.
Guggenheim Investments. All rights reserved.
Research our firm with FINRA Broker Check.
• Not FDIC Insured • No Bank Guarantee • May Lose Value
This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.