The Federal Reserve’s policy pivot has supported a rally in most credit sectors, but investors should worry about excesses continuing to build this late in the cycle. Our recession forecasting tools continue to point to a downturn starting as early as the first half of 2020.
NEW YORK, June 17, 2019 (GLOBE NEWSWIRE) — Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today provided its Second Quarter 2019 Fixed-Income Outlook, titled “Managing While Risk Premia Shrink.”
“While market speculators may still squeeze out the last few basis points of return as risk premia in the market continue to shrink, we are late in the expansion and spreads will widen once more as recessionary forces take hold,” explained Scott Minerd, Chairman of Guggenheim Investments and Global Chief Investment Officer, warning that “ long-term investors should take note that capital preservation is the foremost objective in the later stages of economic expansion.”
While most sectors experienced a strong recovery in the first quarter, retracement had little to do with fundamentals, rather it was the result of the Fed’s policy pivot, which provided the equivalent of at least 50 basis points of easing in the first quarter. “The Fed’s maneuvers may have changed the trajectory of events in the near term, but investors should use market strength as an opportunity to reduce risk in their portfolios,” Minerd said.
With this quarter’s outlook, we also release timely and relevant video commentary from Portfolio Manager Steve Brown, and Brian Smedley, Head of the Macroeconomic and Investment Research Group.
In the 32-page report and video, the investment management team presents a sector-by-sector outlook on relative value, opportunity, and risk. Among the highlights:
- We maintain our duration underweight as some of the recent rally may have been overdone and interest rates may rise if economic data improve. We shifted most of the curve positioning out of the barbell to neutral with the benchmark after the three-month/10-year Treasury curve inverted in March for the first time since 2007.
- Abundant late-cycle signals suggest that the risk-reward of owning credit is unfavorable. We expect risk assets to suffer a severe bear market leading up to and through the next recession. As a result, we continue to maintain liquidity buffers that are higher than typical, which should allow us to pick up undervalued credits during more opportune times.
- An uptick in labor force participation has slowed the pace of decline in the unemployment rate to just 0.2 percentage point in the year through May. Historically, a flattening out of the unemployment rate has been a strong leading indicator of recession, especially when accompanied by a relatively flat Treasury yield curve.
- Within corporate credit, despite a strong first quarter for BBB spreads, the spread ratio of BBBs to single-As reveals plenty of room for further compression.
- In high yield, low defaults, spread compression, and coupons should more than offset the negative impact of higher benchmark rates in the near term. We see better relative value in middle-market bonds as the experience of the fourth quarter drove investors to bonds of companies with larger capital structures that are considered to be more liquid.
- We are still able to find unique opportunities within the whole-business asset-backed securities space, but it seems the word is out. As investor acceptance and sponsorship of whole business
ABS has grown, the spread pickup to BBB corporates has evaporated. Demand has increased as other investors now understand the high-quality credit of this esoteric investment market.
- Even if the Fed’s pause extends the cycle, adding to credit risk at this point in the cycle is akin to picking up pennies in front of a steamroller. Relatively high valuations in a period of increasing uncertainty warrants a cautious stance with regard to risk assets.
For more information, please visit http://www.guggenheiminvestments.com.
About Guggenheim Investments
Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with more than $209 billion1 in total assets across fixed income, equity, and alternative strategies. We focus on the return and risk needs of insurance companies, corporate and public pension funds, sovereign wealth funds, endowments and foundations, consultants, wealth managers, and high-net-worth investors. Our 300+ investment professionals perform rigorous research to understand market trends and identify undervalued opportunities in areas that are often complex and underfollowed. This approach to investment management has enabled us to deliver innovative strategies providing diversification opportunities and attractive long-term results.
1. Guggenheim Investments assets under management are as of 3.31.2019. The assets include leverage of $11.3bn for assets under management. 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.
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 value 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.
One basis point is equal to 0.01 percent.
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 author, 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. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.
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