Portfolio Management Outlook: Opportunity in Fixed Income Rises With Uncertainty

This Portfolio Management Outlook is excerpted from the Second Quarter 2023 Fixed-Income Sector Views.

The first quarter edition of our Fixed-Income Sector Views was posted on Feb. 22, 2023. Less than three weeks later markets faced down an unexpected banking crisis that has continued to permeate. We are not in the business of predicting black swans but we are in the business of preparing our portfolios for a range of outcomes, and as we headed into the week of Silicon Valley Bank’s (SVB) downfall we were already positioning for late-cycle market activity, a time when unwanted market surprises are more likely to occur. For several quarters we have been rotating portfolios to be more defensive by reducing certain exposure and increasing credit quality, conservative positioning that we believe will continue to help our clients weather the storm. With the subsequent fall of additional banks in the United States, and of global systemically important bank Credit Suisse, we are reminded that the SVB episode was not an isolated, idiosyncratic incident. It also shined a light on one of the most fundamental tenets of investing—the importance of diversification, whether at the sector or the issuer level.

Markets are still facing uncertainties regarding the impact of the Federal Reserve’s (Fed) aggressive rate hikes and quantitative tightening, a potential economic slowdown, and the likelihood of other unforeseen consequences of financial disintermediation. However, it remains one of the most attractive times in the post-GFC era to be invested in U.S. fixed income, particularly relative to other more volatile asset classes. With continued elevated yields and spreads, debt holders are taking a greater share of the economics than equity holders and this trend seems unlikely to end soon. This portends continued opportunities across credit and more negotiating leverage for creditors to influence pricing and terms. 

Throughout this edition of Fixed-Income Sector Views, our Sector teams acknowledge the many headwinds facing credit investors, including rising default and downgrade risk, the decline in new issuance volume in many sectors, and signs of pre-recession weakening in corporate and municipal credit performance. Markets like these represent opportunity for active fixed-income asset managers. For example, we are taking advantage of any moves higher in Treasury yields at the short end of the yield curve and are positioning for greater spread dispersion between sectors and across the quality spectrum. While the risk of defaults is rising in corporate credit on an aggregate basis, some issuers and sectors may be oversold, creating potentially attractive entry points from a portfolio perspective. The same is true in structured credit, where certain commercial ABS sectors continue to offer discounted dollar prices and wider spreads compared to similarly rated corporate credit alternatives.

With high yields available on relatively lower risk assets within credit, it is a good time to be defensive and maintain elevated levels of liquidity. This posture is designed to help protect our portfolios against late-cycle uncertainty, and position us to be rewarded as a provider of capital down the road.

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

Important Notices and Disclosures

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. Investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their values to decline. 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, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.

GPIM 57383

VIDEOS AND PODCASTS

 

Are Fixed-Income Investors Being Compensated for the Risks They Are Taking?

Maria Giraldo, Investment Strategist for Guggenheim Investments, joins Asset TV’s Fixed Income Masterclass.

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Are Fixed-Income Investors Being Compensated for the Risks They Are Taking?

 

Macro Markets Podcast Episode 51: What's Holding Up Inflation…And Other Macro Themes

Matt Bush and Maria Giraldo join the Macro Markets podcast to discuss our newly published Quarterly Macro Themes for 1Q 2024.

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Macro Markets Podcast: Episode #51