Walsh cites airline asset-backed securities as one type the fund looks for. Because airplanes serve as collateral, investors have an additional layer of security. And even if an airline goes bankrupt, flying operations that generate money to pay debtholders can continue. These characteristics make the securities much more attractive than traditional airline bonds, which are much more susceptible to default. Other areas of the transportation industry, such as trains, are facing severe constrictions on bank lending and are using asset-backed securities as a way to fill the void. Like the airline securities, these are also backed by equipment that serves as collateral.

In addition to their yields, which are comparable with or even higher than those of traditional corporate bonds, both commercial asset-backed securities and CLOs have other attractive features. Many offer significant downside protection during times of economic stress because their asset values exceed debt obligations, because they boast reserve accounts and because they have triggers that cut off cash flows to subordinated tranches. Also, the amortizing structures of many asset-backed securities reduce credit exposure over time, since a portion of the principal gets paid down over the life of the security.

Non-agency residential mortgage-backed securities make up another 21% of the Guggenheim portfolio. These bonds are backed by residential mortgage loans issued by banks that don’t have government backing, including jumbo loans and non-conforming mortgages. After the financial crisis, most of the securities plummeted in value as homeowners defaulted and the bonds were assigned ratings below investment grade. The fund began buying the bonds at a steep discount after the economy and housing market improved and default rates became more predictable.

Today, most of the bonds trade at 60% to 100% of par value, depending on the underlying pool of mortgages. “These are now seasoned bonds,” Walsh says. “We have a good idea of how borrowers will behave and the ongoing probability of foreclosure.” Most of them have floating rates in the 3% to 5% range and have a weighted average life of 2.5 years. One relatively new type of non-agency residential mortgage-backed bond the fund has invested in provides an added layer of protection by combining outstanding issues and repackaging them into new bonds with the remaining better quality underlying mortgages.

Another way of controlling risk in the current environment is a “barbell approach” in which the fund populates one side of the portfolio with floating-rate and short-term securities, and the other with securities that mature in 10 years or more. Bonds with higher credit ratings, such as Treasury and agency securities, dominate the longer side of the portfolio. The fund also has about 5% of assets in long-dated taxable municipal bonds purchased through the Build America Bonds program that began after the financial crisis and ended in 2010.

The two sides of the portfolio combine to produce an effective duration of 4.1 years, versus 5.6 years for the Barclays Aggregate. The positioning reflects the expectation that as the Fed raises rates, yields on short- and intermediate-term securities will go up first and the yield curve will flatten. If prior Fed tightening cycles are any indication, long-term rates could end lower than short-term rates as future growth expectations decline. Although the shift is likely to be gradual, the scenario implies greater volatility at the shorter end of the curve, where the fund is protected by the floating rates on its holdings.