/perspectives/portfolio-strategy/tailwinds-for-fixed-income
Portfolio Management Outlook: Tailwinds for Fixed Income
The fixed-income outlook appears bright as the Fed continues its easing cycle though risks remain, making sector allocation and credit selection critical.
Our baseline U.S. economic outlook anticipates a gradual slowdown in growth, and inflation falling near the Federal Reserve’s (Fed) 2 percent target. The election outcome tilts our inflation assumptions incrementally higher, while the growth outlook is more uncertain with both upside and downside policy-related risks. Consumer spending remains strong, supported by real income gains and elevated household wealth, and corporate profitability is robust. Still, as immigration slows and high interest rates continue to pressure some segments of the economy, growth is likely to slow from here, but the new administration will be loath for that to occur immediately on their watch.
The outlook is unusually uncertain given the regime change in Washington. At face value, a pro-tax cut, anti-regulation policy would skew growth and inflation higher. But immigration, tariffs, and the potential for trade wars or other geopolitical escalation are potential headwinds. And, while on balance labor market data still point to an ongoing gradual moderation in labor demand, noisy releases associated with special factors leave open questions about the strength of hiring. Meanwhile, the Fed will continue to recalibrate policy closer to neutral in the coming quarters.
In an environment of moderating growth and continued Fed easing, all-in yields remain attractive, particularly given the backup since September. Credit fundamentals are healthy overall, but somewhat dispersed. While much of the economy prospers, small businesses, low income consumers, and certain sectors of commercial real estate struggle under the weight of sharply higher interest rates. Spreads in most asset classes are back to their YTD tights, but some relationships still have room to compress.
With index spreads tight, our positioning skews defensive. We prefer higher quality credit, which tends to perform well in easing cycles, and structured products, which typically offer excess yield over similarly rated corporates, and wider spreads relative to fundamental risk. We are maintaining healthy cash positions and targeting an average level of credit beta to position our portfolios for potential opportunities.
In terms of duration, the yield curve has steepened significantly since the Fed began lowering interest rates, and we expect it to steepen further as rate cuts continue and the budget deficit grows. In this environment, we maintain a bias toward the belly of the curve given its historical outperformance during easing cycles. We prefer to express duration in this environment using Agency residential mortgage-backed securities (RMBS)—a liquid alternative to Treasurys with yield pickup—and Treasury inflation-protected securities (TIPS).
Historically, higher quality bonds have performed well in soft landings and even better in recessions, outperforming cash and riskier assets like stocks. Nonetheless, in this environment of growing disparity, credit and sector selection are critical—and an advantage for actively managed portfolios.
—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. 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 63183
VIDEOS AND PODCASTS
Maria Giraldo, Investment Strategist for Guggenheim Investments, joins Asset TV’s Fixed Income Masterclass.
Steve Brown, Chief Investment Officer for Fixed Income, joins Macro Markets to discuss portfolio strategy and our outlook following the U.S. election and the Fed’s most recent rate cut.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
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Investing involves risk, including the possible loss of principal.
*Assets under management is as of 9.30.2024 and includes leverage of $14.8bn. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Guggenheim Wealth Solutions, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, and GS GAMMA Advisors.
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