As a new trading year begins, investors in U.S. Treasury and Agency markets stand to benefit from the potential recovery of one the worst yearly return periods of the last 50 years. This opportunity for positive total return comes on the heels of a year shaped by the Fed’s fight to tackle inflation that was more persistent than most market participants expected. As the FOMC increased the fed funds rate by a cumulative 425 basis points in less than nine months, Treasury yields pushed 200–370 basis points higher, reaching levels not seen for 15 years. Now, with inflation showing signs of abating, we believe that Fed tightening will reach its terminal rate by midyear.
As market participants become more comfortable with the potential end to the Fed’s tightening cycle, Treasury market liquidity should continue to improve and interest rate volatility should continue to decline. In this environment, callable Agency spreads will likely benefit and tighten from historically wide levels relative to Treasury securities of similar maturities. Additionally, we expect that attractive yields, historically wide spreads, and limited new supply for Agency bullet securities should help to drive positive performance for Agency debentures.
We believe that most of the flattening in the yield curve is behind us and that the Fed will keep rates on hold for longer than in past cycles. Accordingly, we have started to reduce some of our duration underweight positioning at the front end of the curve. Looking forward, as inflation continues to subside, the unemployment rate eventually rises from historically low levels, and the economy approaches a recession later this year, the Fed will likely wind down its hiking cycle, supporting the market’s current pricing of the next easing cycle. In anticipation of this chain of events, we will seek opportunities to invest in assets in the front and intermediate part of the curve, and consider curve positions that will benefit from an eventual steepening of the yield curve.
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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. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-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 risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Municipal bonds may be subject to credit, interest, prepayment, liquidity, and valuation risks. In addition, municipal securities can be affected by unfavorable legislative or political developments and adverse changes in the economic and fiscal conditions of state and municipal issuers or the federal government in case it provides financial support to these issuers.
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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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*Assets under management is as of 9.30.2023 and includes leverage of $15.9bn. 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 Advisors, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.
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