Rates: When Doves Cry
The next 50 basis-point move in the Treasury yield curve is likely to be a steepening.
The doves cried louder in the second quarter. The December 2020 fed funds futures contract traded at an implied yield of 1.89 percent at the end of March, but ended June at an implied yield of 1.32 percent, adding the expectation of at least four rate cuts over the next 18 months. The FOMC also ended the second quarter with a decidedly more dovish outlook, with members lowering their 2019 median target projection for the fed funds rate in 2020. The Fed then proceeded to lower the target range by 25 basis points in July despite a string of solid economic data in the weeks leading up to the meeting. The fed funds futures market is currently pricing in 60 basis points of additional rate cuts for 2019 following July’s ease, and more by the end of 2020.
Market Is Pricing in Sharp Cuts for 2019 and 2020
Cuts Priced in by Calendar Year in Basis Points
The fed funds futures market is currently pricing in 60 basis points of additional rate cuts in 2019 following July’s ease, and more by the end of 2020.
Source: Guggenheim Investments, Bloomberg. Data as of 7.31.2019.
The U.S. Treasury yield curve bull steepened in the second quarter and yields declined by 30–50 basis points across the curve. The long-end of the Bloomberg U.S. Treasury index (maturities of 20 years and beyond) clipped the best performance with a year-to-date total return of 11.0 percent, the best first half since 2016.
Strong First-Half Performance at the Long End of the Curve
Bloomberg Barclays Treasury Index, 20+ Year Maturities
The long end of the Bloomberg U.S. Treasury index (maturities of 20 years and beyond) clipped the best performance with a year-to-date total return of 11.0 percent, the best first half since 2016. This performance may be difficult to repeat in the second half because yields at the long end would have to decline from about 2.5 percent to 2.0 percent by year-end to return another 11 percent.
Source: Guggenheim Investments, Bloomberg. Data as of 6.30.2019.
We have begun to position portfolios to outperform in a steeper yield curve environment, as we believe the next 50-basis-point move will bring a steepening to the yield curve. If the Fed eases aggressively or, conversely, delivers fewer rate cuts than anticipated, the Treasury yield curve should still steepen: either front-end rates will fall faster than the long end or the long end will sell off more than the front end. The rally in the Treasury market has also led to a large increase in callable redemptions, and the resulting increase in supply has been met with tighter spread levels on new issue bonds. We continue to focus on longer lockout callable debt and fixed-rate bullet Agency bonds.
—Connie Fischer, Senior Managing Director; 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.
©2019, 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.
VIDEOS AND PODCASTS
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.
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.
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 06.30.2022 and includes leverage of $18.3bn. 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.