Portfolio Strategy

The Core Conundrum

July 20, 2015

As benchmark yields languish near historical lows, the chasm between investors’ return targets and current market realities deepens, creating a conundrum for core fixed-income investors.

Report Highlights

  • The combined impact of U.S. monetary and fiscal policy has created the core conundrum: How can core fixed-income investors meet their yield objectives while maintaining low tracking error to the Barclays Agg, which has become approximately 70 percent concentrated in low-yielding government-related debt?
  • The benign credit environment is encouraging some investors to take investment shortcuts to generate yield, such as increasing credit and duration risk. Investors may be underestimating these risks, particularly as the accommodative policy environment slowly draws to an end.
  • In the current environment, we believe the surest path to underperformance is to remain anchored to the past. Investors must develop a new, sustainable, long-term strategy to generate attractive returns. Opportunities exist beyond the Barclays Agg, where robust credit work can uncover a world of investment-grade, fixed-income securities with higher yields and lower durations than government and corporate bonds.
  • Accessing short-duration, high-quality investment-grade securities with considerable yield pickup relative to government and corporate bonds may be the investment blueprint needed to navigate the current low-rate environment and hedge against interest-rate risk.
 
 
 

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions 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. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2015, Guggenheim Partners. 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.
 



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