/perspectives/sector-views/rates-look-for-long-duration-opportunities-as-fed

Rates: Look for Long Duration Opportunities as the Fed Tightens

Given that the yield curve will likely continue to flatten, we favor buying on-the-run Treasurys at the long end of the curve.

August 02, 2022


This Rates sector report is excerpted from the Third Quarter 2022 Fixed-Income Sector Views.

This year is proving to be one of the most difficult investing environments fixed-income market participants have ever experienced. Geopolitical uncertainties, illiquid Treasury markets, and the continued rise in global prices have all led to unprecedented volatility.

As inflation has proven to be anything but transitory, central banks across the globe have had to act in a swift and hawkish manner to defend their credibility, even at the risk of forcing their economies into recession. For its part, by June the Fed had cumulatively raised rates by 150 basis points in 25, 50, and 75 basis point increments, while at the same time wrapped up its massive quantitative easing program.

The Fed’s policy actions led to a bear flattening of the yield curve and a significant move higher in Treasury yields. In the first half of 2022, two-year Treasury yields increased by 220 basis points, and 10-year Treasury yields increased by 150 basis points, narrowing the spread between them to just 6 basis points. Treasurys have experienced their worst first-half returns in the past 50 years, with the index down 9.1 percent through June. Compounding an already challenging environment, liquidity thinned with the Fed no longer buying Treasury securities, which caused bid/offer spreads to widen materially across the curve and magnify the impact of price movements.

We believe that front-end Treasurys will continue to underperform as the Fed continues its tightening campaign, and that the yield curve will likely continue to flatten. For this reason, we favor buying on-the-run Treasurys at the long end of the curve. Further, with the significant underperformance of the 20-year sector, it is possible that the Treasury Department will announce additional cuts to 20-year bond issuance in August, creating an attractive relative value opportunity in that part of the curve.

Looking to the remainder of the year, the Fed’s forward guidance has the market expecting an additional 90 basis points of tightening to a terminal fed funds rate of about 3.25 percent. However, the release of rapidly evolving economic data will likely present the FOMC with some policy decision challenges which either slow down or accelerate the pace of tightening.

Front-End Treasurys Will Continue to Underperform as the Fed Tightens

Treasury Yield Curves 12.31.2021 vs. 6.30.2022
Front-End Treasurys Will Continue to Underperform as the Fed Tightens

Source: Guggenheim Investments, Bloomberg. Data as of 6.30.2022

—By Kris Dorr and Tad Nygren

 
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. 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.

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 Fund Management (Europe) Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.

©2022, 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 53592


FEATURED PERSPECTIVES

August 02, 2022

Third Quarter 2022 Fixed-Income Sector Views

Relative value and performance drivers across fixed-income sectors.

June 30, 2022

Recession Signals Flashing Red

The latest data suggest that we may already be in a recession.

May 24, 2022

Despite the Gray Mood, Skies Are Only Partly Cloudy

The outlook for credit amid rising inflation, monetary tightening, and war in Europe.


VIDEOS AND PODCASTS

Recession ‘Inevitable’ as the Fed Fights Inflation 

Recession ‘Inevitable’ as the Fed Fights Inflation

Scott Minerd, Chairman of Investments and Guggenheim Partners Global CIO, joins Bloomberg TV on Fed Day to discuss the Federal Reserve’s largest rate hike since 1994.

Macro Markets Podcast 

Macro Markets Podcast Episode 19: A Close Look at Hotel Real Estate/Macro Update

Jenny Marler, head of Guggenheim Real Estate, focuses on hotels and hospitality, and Jerry Cai, a Vice President in the Macroeconomic and Investment Research Group, reviews the Fed’s decision and other data.







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.

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 Fund Management (Europe) Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.

© 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.