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Managing While Risk Premia Shrink

The Federal Reserve’s policy pivot has supported a rally in most credit sectors, but investors should worry about late cycle excesses.

June 17, 2019


Fixed Income Outlook video

Steve Brown and Brian Smedley share insights from the Second Quarter Fixed-Income Outlook


Fixed-Income Outlook

Second Quarter 2019

Here are the key takeaways from our latest Fixed-Income Outlook report:

  • We maintain our duration underweight and shifted most of the curve positioning out of the barbell to neutral with the benchmark.
  • Abundant late-cycle signals suggest that the risk-reward of owning credit is unfavorable
  • We continue to maintain liquidity buffers that are higher than typical, which should allow us to pick up undervalued credits during more opportune times.
  • An uptick in labor force participation has slowed the pace of decline in the unemployment rate to just 0.2 percentage point in the year through May. Historically, a flattening out of the unemployment rate has been a strong leading indicator of recession.
  • Even if the Fed’s pause extends the cycle, adding to credit risk at this point in the cycle is akin to picking up pennies in front of a steamroller. Relatively high valuations in a period of increasing uncertainty warrants a cautious stance with regard to risk assets.
  • Our recession forecasting tools continue to point to a downturn in the next six to 12 months.
 
 
Important Notices and Disclosures

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 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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FEATURED PERSPECTIVES

July 29, 2019

The Fed's Sugar High

Rational immigration policy, not rate cuts, is the way to avoid recession.

July 17, 2019

High-Yield Credit in a Fed Easing Cycle

High-yield corporate bond spreads and bank loan discount margins typically widen when the Fed is lowering interest rates.

May 23, 2019

U.S.-China Trade War: The New Long March

Beijing is preparing for a protracted standoff as the U.S.-China trade war ramps up.


VIDEO

Second Quarter 2019 Fixed-Income Outlook 

Second Quarter 2019 Fixed-Income Outlook

Portfolio Manager Steve Brown and Brian Smedley, Head of the Macroeconomic and Investment Research Group, explain that while the Federal Reserve's pause in policy has supported a rally in most credit sectors, investors should worry about excesses continuing to build this late in the cycle.

Core Fixed-Income Conundrum 

Solving the Core Conundrum

Anne Walsh, Chief Investment Officer for Fixed Income, shares insights on the fixed-income market and explains the Guggenheim approach to solving the Core Conundrum.







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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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