Credit Yields Look Attractive Despite Rising Recession Risks

High-Yield and Bank Loan Outlook

Third Quarter 2022

Here are the key takeaways from our latest High-Yield and Bank Loan Outlook report:

• Although July saw a solid recovery for risk assets, a looming concern is that aggressive Federal Reserve (Fed) policy will trigger an economic recession in the United States, a risk that rises with data showing stubbornly persistent inflation even as economic activity cools.
• The probability of a recession in 2023 is rising meaningfully, but there are some indications that the recession may have already arrived.
• In the lead up to recession, we expect to see corporate earnings outlooks fall, more credit downgrades than upgrades, and default activity rise from its current low.
• Strong balance sheets that boast a healthy liquidity profile and sticky cash flows to cushion a pullback in economic activity will be in demand.
• As we navigate downside risks, our approach is to select the best credits within industry silos.
• High-yield corporate bond yields are nearly 8 percent, and leveraged loan yields are nearly 9 percent. Each has traded at average yields of 6.3-6.4 percent since 2010.

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 author, 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.

One basis point is equal to 0.01 percent.

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.

©2022, Guggenheim Partners, LLC. 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.

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