Despite tight credit spreads, yields are attractive, technical dynamics are solid, and fundamentals, though deteriorating, are doing so at a manageable pace. These factors present a good opportunity to reshape positioning on the credit curve and within different subsectors as we work through the first quarter and head into what may be a more volatile second quarter.
The favorable technical picture for investment-grade corporate bonds that we saw in the fourth quarter of 2023 should continue through the first quarter of 2024. On the supply side, we saw record breaking primary issuance in January of around $195 billion. This supply should be more than offset by the demand side of the equation, which remains strong due to historically attractive all-in yields for investment-grade corporates. As we go further into the year, we expect gross and net supply trends to continue reverting to the mean after reaching post-2020 record highs and to trend lower in 2024 relative to 2023.
Additionally, thematic asset shifts from insurers and pension funds continue to fuel the demand for longer duration corporate debt alongside the dearth of 30-year supply. Investor weighting to investment-grade credit was still defensive going into year-end 2023, but more offensive positioning was triggered when the Fed signaled no further rate hikes and potentially aggressive rate cuts in 2024. This was evidenced by accelerating inflows to both ETFs and mutual funds in the fourth quarter, from $5.8 billion of outflows in October to inflows of $14.4 billion in November and $20.2 billion in December. This sentiment continued into the New Year, with January inflows totaling $28.9 billion.
Strong technicals will likely continue to outweigh slowly deteriorating fundamentals, which should help keep spreads rangebound near the tighter end. While spreads are in historically low percentile ranges relative to the last 20 years, all-in yields remain attractive enough to support spreads this quarter.
We continue to favor financials over industrials. Financials are currently trading cheap to industrials on a historical basis and the market is well-positioned for an expected seasonally strong wave of issuance by large banks. As fundamentals shift, overbought industrial sectors like consumer cyclicals and energy should underperform. Although we expect 10/30s credit curves to remain flat this quarter, the duration in the industrial portion of the Bloomberg U.S. Corporate Bond Index is nearly 2.5 years longer than that of financials, which leaves industrial credit curves more vulnerable to the 10/30s credit curve steepening.
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: 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.
©2024, Guggenheim Partners, LLC. All Rights Reserved. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Guggenheim Partners, LLC.
GPIM 60475
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.
Investing involves risk, including the possible loss of principal.
*Assets under management is as of 3.31.2024 and includes leverage of $14.5bn. 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 Partners Europe Limited, Guggenheim Partners Japan Limited, and GS GAMMA Advisors.
This is not an offer to sell nor a solicitation of an offer to buy the securities herein. GCIF 2019 and GCIF 2016 T are closed for new investments.
©
Guggenheim Investments. All rights reserved.
Research our firm with FINRA Broker Check.
• Not FDIC Insured • No Bank Guarantee • May Lose Value
This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such 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. All content has been provided for informational or educational purposes only and 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. Investing involves risk, including the possible loss of principal.