/perspectives/sector-views/rates-positive-outlook-for-treasury-returns

Rates: Positive Outlook for Treasury Returns

Income will be a significant driver of returns for investors.

August 21, 2023


This Rates sector report is excerpted from the Third Quarter 2023 Fixed-Income Sector Views.

The volatility in the Treasury market during the first quarter of the year persisted into summer as economic data supported continued aggressive Fed action. Robust employment data and sticky core inflation demonstrated a resilience in the economy that resulted in an increase in expectations for the Fed’s forecasted terminal rate. With the terminal rate destination in flux, the front end of the curve bore the brunt of the volatility, increasing by 85 basis points in yield over the course of the second quarter. The Fed continued its hawkish stance with a 25 basis point increase at its July meeting, and our Macroeconomic and Investment Research Group is expecting an additional 25 basis points hike this fall. But the end of the current tightening cycle is close at hand. We expect the next large move in the Treasury yield curve will be a bull steepening that would be driven by easing of monetary policy in 2024.

As the yield curve flattened, the Treasury market total return of 3.0 percent during the first quarter decreased substantially to 1.6 percent for the first half of the year. However, while the Treasury returns were diminished, the Treasury market index, yielding 4.35 percent as of June 30, looks attractive. Looking ahead, we continue to think that Treasury returns will be positive for the remainder of this year and that income will be a significant driver of this return.

We will continue to take advantage of any Treasury yield backups in the intermediate part of the curve, opportunistically adding to underweight positions. Additionally, given the large increase seen in real yields during the second quarter and the low levels of breakeven inflation rates, we believe owning some inflation protection in our portfolios makes sense.

Treasury Nominal and TIPS Appear Attractive in the Intermediate Part of Yield Curve

5-Year Treasury Inflation-Protected Securities (TIPS), Nominal, and Breakeven Yields

With the breakeven rate—market-implied expectations for average annual inflation over the next five years—low relative to current realized inflation, combined with our view that the Fed will only raise rates once more this cycle, yields on nominal Treasurys and TIPS appear attractive in the near term.

Treasury Nominal and TIPS Appear Attractive in the Intermediate Part of Yield Curve

Source: Guggenheim Investments, Bloomberg. Data as of 7.14.2023.

—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, 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.

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, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.

©2023, 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.

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Maria Giraldo, Investment Strategist for Guggenheim Investments, joins Asset TV’s Fixed Income Masterclass.

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Macro Markets Podcast Episode 52: Fixed-Income Investing for Insurance Companies (and Listener Mail)

Jamie Crapanzano, a member of our insurance portfolio management team, joins the podcast to discuss the distinctive aspects of fixed-income management for insurance companies and provide an update on bond market relative value.







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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 Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, and GS GAMMA Advisors.

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