/perspectives/portfolio-strategy/pm-outlook-slow-growth-strong-bonds
Portfolio Management Outlook: Slow Growth, Strong Bonds
As the economy slows, bonds offer attractive yields and total return potential, but credit selection is critical.
Our baseline U.S. economic outlook projects real gross domestic product (GDP) growth to slow to 1.7 percent this year and remain near that pace next year, as tax cuts and elevated asset prices offset tariff passthroughs and support consumer spending, while business investment—particularly in artificial intelligence (AI)—remains solid. At the same time, lower income households and interest sensitive industries continue to struggle amid elevated inflation, high interest rates, and tariffs, and businesses have slowed hiring. We expect the Federal Reserve (Fed) to execute two more 25 basis point cuts this year, which would bring the upper bound of the fed funds rate to 3.75 and continue easing toward 3 percent by the end of 2026 to bolster the softening labor market, while slower growth weighs on inflation.
Credit and Risk Positioning
Amid a slower economic growth trajectory and heightened uncertainty, our investment approach is guided by key market dynamics: Real yields are very attractive; the Fed is easing; credit spreads are near historic tights, with little differentiation between high and low quality securities; investor demand for credit is strong, while issuance is low; and corporate fundamentals are strong, but we expect them to continue diverging among industries as some are more vulnerable to tariffs.
Our positioning remains primarily defensive. We prefer higher quality credit, particularly structured credit, where spreads remain wider relative to fundamental risk, and defensive assets like infrastructure, which offers 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, strong fundamentals, attractive yields, and low vulnerability to tariff and regulatory risks. We are maintaining a high level of liquidity, using market strength to rotate, diversify, and capture attractive opportunities created by the volatility.
As the economy slows and the Fed balances the risks of rising inflation against a softening labor market, higher quality credit offers attractive real yields, potential price appreciation, and diversification to help buffer downside risks. Still, with credit performance diverging across industries and spreads remaining tight, active selection and risk management are critical.
Duration and Interest Rate Views
The 10-year Treasury yield should remain rangebound between 3.75–4.75 percent, with upward pressure from fiscal policy offset by slowing growth and Fed rate cuts. Though volatility in 10-year Treasury yields has ebbed, we intend to take advantage of brief spikes to tactically add duration—including in in Treasury Inflation-Protected Securities (TIPS)—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 premium to compensate for the risk of growing fiscal deficit. In this environment, we favor the belly of the curve, which is poised to outperform as the Fed eases.
—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.
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Investing involves risk, including the possible loss of principal.
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 Corporate Funding, LLC, Guggenheim Wealth Solutions, LLC, Guggenheim Private Investments, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, and GS GAMMA Advisors, LLC, .
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