/perspectives/sector-views/rates-positioned-for-a-dovish-fed
Rates: Positioned for a Dovish Fed
Anticipated fiscal stimulus could push 10-year rates above current levels and would present a buying opportunity.
Following a year that will be remembered for the devasting human and economic effects of the global pandemic and domestic political uncertainties, 2021 began with some clarity and perhaps even a touch of optimism. While elevated COVID-19 infections and virus mutations around the world continue to signal that the pandemic is far from over, the development and emergency approval of several effective vaccines provided the much-needed hope that the pandemic’s end could possibly be in sight. In addition to the positive vaccine developments, market participants were also buoyed by the Fed’s ongoing commitment to support the recovery through accommodative monetary policy. Furthermore, the election of a Democratic government majority in the United States reassured the market that additional large-scale fiscal stimulus was likely to be on the way. As positive news evolved, the prospects for increased global growth propelled equities to near all-time highs, moved longer term Treasury yields higher, and lifted market-implied inflation expectations.
While the fourth quarter experienced a bear steepening of the Treasury curve with yields increasing 20–25 basis points in the long end, policy easing by the Fed during the first half of the year drove an overall bull steepening for the year, driving yields lower by 75–145 basis points across the curve.
Fed Policy Easing Led to a Steeper Treasury Yield Curve
U.S. Treasury 5-Year/30-Year Yield Curve
While the fourth quarter experienced a bear steepening of the Treasury curve with yields increasing 20–25 basis points in the long end, policy easing by the Fed during the first half of the year drove an overall bull steepening, driving yields lower by 75–145 basis points across the curve.
Source: Guggenheim Investments, Bloomberg. Data as of 1.29.2021.
This led to significant gains for the Treasury market, with the index delivering a total return of 8.0 percent in 2020. The longer end of the Treasury market experienced even stronger returns, with the Treasury 20+ year index generating an 18.1 percent total return for the year.
Looking ahead, we expect a new round of fiscal stimulus of roughly $1.9 trillion to be passed imminently, which will require higher net Treasury issuance than would have otherwise been the case. This stimulus has boosted growth and inflation expectations and could push 10-year rates to as high as 1.75–2.00 percent, which we would see as a buying opportunity. While we do not expect a broad-based or sustained spike in inflation, inflation expectations have risen, resulting in a steeper yield curve.
Market Implied 10-Year Inflation Expectations Have Recovered
10-Year Treasury Inflation-Protected Securities Breakeven Rate
While we do not expect a broad-based or sustained spike in inflation, inflation expectations have risen, resulting in a steeper yield curve. We believe the Fed’s policy of flexible average inflation targeting—in which the Fed will seek to achieve inflation above 2 percent to make up for periods of below-target inflation—will translate into a longer period of short-term rates at zero than the market is currently pricing in.
Source: Guggenheim Investments, Bloomberg. Data as of 1.15.2021.
We believe the Fed’s policy of flexible average inflation targeting—in which the Fed will seek to achieve inflation above 2 percent to make up for periods of below-target inflation—will translate into a longer period of short-term rates at zero than the market is currently pricing in. As such, we see attractive carry and roll-down opportunities in the front end and belly of the yield curve.
—Kris Dorr, Managing Director; Tad Nygren, CFA, Managing Director
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. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.
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 of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.
©2021, 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.
VIDEO
Portfolio Manager Adam Bloch and Matt Bush, a Director in the Macroeconomic and Investment Research Group, share their outlook for the first quarter 2021.
Anne Walsh, Chief Investment Officer for Fixed Income, shares insights on the fixed-income market and explains the Guggenheim approach to solving the Core Conundrum.
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 12.31.2020 and includes leverage of $13.7bn. 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, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.
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.
By choosing an option below, the next time you return to the site, your home page will automatically
be set to this site. You can change your preference at any time.
We have saved your site preference as
Institutional Investors. To change this, update your
preferences.
United States Important Legal Information
By confirming below that you are an Institutional Investor, you will gain access to information on this website (the “Website”) that is intended exclusively for Institutional Investors and, as such, the information should not be relied upon by individual investors. This Website and any product, content, information, tools or services provided or available through the Website (collectively, the “Services”) are provided to Institutional Investors for informational purposes only and do not constitute a recommendation to buy or sell any security or fund interest. Nothing on the Website shall be considered a solicitation for the offering of any investment product or service to any person in any jurisdiction where such solicitation or offering may not lawfully be made. By accessing this Website, you expressly acknowledge and agree that the Website and the Services provided on or through the Website are provided on an as is/as available basis, and except as partnered by law, neither Guggenheim Investments and it parents, subsidiaries and affiliates nor any third party has any responsibility to maintain the website or the Services offered on or through the Website or to supply corrections or updates for the same. You understand that the information provided on this Website is not intended to provide, and should not be relied upon for, tax, legal, accounting or investment advice. You also agree that the terms provided herein with respect to the access and use of the Website are supplemental to and shall not void or modify the Terms of Use in effect for the Website. The information on this Website is solely intended for use by Institutional Investors as defined below: banks, savings and loan associations, insurance companies, and registered investment companies; registered investment advisers; individual investors and other entities with total assets of at least $50 million; governmental entities; employee benefit (retirement) plans, or multiple employee benefit plans offered to employees of the same employer, that in the aggregate have at least 100 participants, but does not include any participant of such plans; member firms or registered person of such a member; or person(s) acting solely on behalf of any such Institutional Investor.
By clicking the "I confirm" information link the user agrees that: “I have read the terms detailed and confirm that I am an Institutional Investor and that I wish to proceed.”