Portfolio Management Outlook: Fixed Income Has Generated Strong Returns Year to Date, With Continued Momentum as the Economy Slows

This Portfolio Management Outlook is excerpted from the Third Quarter 2025 Fixed-Income Sector Views.

The macro backdrop remains supportive for fixed income and credit. Our baseline U.S. economic outlook projects real gross domestic product (GDP) growth to slow below 1 percent this year, with inflation rising above 3 percent, as tariff-induced price increases—which have yet to be felt—filter through and cut consumer spending power. Business investment and hiring are slowing amid trade and regulatory uncertainty, a trend we expect will continue, boosting the unemployment rate and prompting the Federal Reserve (Fed) to start easing later this year. We expect Fed cuts to accelerate in 2026 as the one-time tariff price increases fade, taking the policy rate into the low 3s. The upcoming Fed leadership change may lead to markets perceiving a bias towards a lower fed funds rate.

Credit and Risk Positioning

Returns have been strong year to date across all categories of fixed income, with most sectors outperforming their starting yield. Returns have been very similar across categories, but that could change. Amid a slowing economy and bouts of market volatility, our investment approach is guided by key market dynamics: real yields are very attractive; credit spreads have tightened; risks to our baseline economic outlook are heightened; and corporate fundamentals are strong, but we expect them to diverge among industries as some are more vulnerable to tariffs, international demand or a more stretched consumer.

Our positioning continues to prioritize diversification with a high level of income generation. We prefer higher quality credit as credit curves have flattened, particularly structured credit, where spreads remain wider relative to fundamental risk, and defensive assets like infrastructure, which historically has offered inflation-linked income and downside resilience. We prioritize high carry instruments, including non-Agency residential mortgage-backed securities (RMBS), senior collateralized loan obligations (CLO) tranches, and commercial asset-backed securities (ABS). In corporate credit, we favor higher quality high yield (BB-rated) securities with low expected direct and indirect vulnerability to tariff and regulatory risks. We are making tactical rotations, using market weakness to add, and strength to rotate, diversify, and capture opportunities created by the volatility.

Duration and Interest Rate Views

The 10-year Treasury yield should remain range-bound between 3.75–4.75 percent as policy changes unfold, with upward pressure from fiscal policy offset by slowing growth and easing monetary policy. Elevated volatility in the 10-year Treasury presents opportunities for us to tactically add duration when yields reach the higher end of the range and sell when near the lower end. Over the next year, we anticipate the yield curve to steepen further, led by rate cuts on the front end, and persistently higher yields on the long end as investors require greater term premiums to compensate for the risk of growing fiscal deficits. In this environment, we favor the belly of the curve, which we believe is poised to outperform as the Fed eases.

As growth slows and policy uncertainty creates a wider range of economic outcomes, higher quality credit can offer attractive real yields, diversification, and portfolio ballast to help buffer downside risks. As credit performance diverges among industries, however, and the yield curve shifts, active selection and risk management are critical.

—By Anne Walsh, Steve Brown, Adam Bloch, and Evan Serdensky

Important Notices and Disclosures

One basis point is equal to 0.01%.

S&P bond ratings are measured on a scale that ranges from AAA (highest) to D (lowest). Bonds rated BBB- and above are considered investment-grade while bonds rated BB+ and below are considered speculative grade.

This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This 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. The content contained herein 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.

This material contains opinions of the authors, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward-looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

Investing involves risk, including the possible loss of principal. In general, the value of a fixed-income security falls when interest rates rise and rises when interest rates fall. Longer term bonds are more sensitive to interest rate changes and subject to greater volatility than those with shorter maturities. During periods of declining rates, the interest rates on floating rate securities generally reset downward and their value is unlikely to rise to the same extent as comparable fixed rate securities. High yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility. Investors in asset-backed securities, including mortgage-backed securities and collateralized loan obligations (“CLOs”), generally receive payments that are part interest and part return of principal. These payments may vary based on the rate loans are repaid. Some asset-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 and valuation risk. CLOs bear similar risks to investing in loans directly, such as credit, interest rate, counterparty, prepayment, liquidity, and valuation risks. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.

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, and GS GAMMA Advisors, LLC..

GPIM 65510