Views From The Experts 
Anne B. Walsh, JD, CFA
Chief Investment Officer
Fixed Income
Guggenheim Investments
Avoiding The Fate Of ’98
History provides an important lesson regarding overheating economies. These are periods in which bubbles form, such as in 1998, when the Federal Reserve (Fed) cut interest rates by 75 basis points. As a result, the expansion was prolonged, but technology stocks inflated and their ultimate collapse spilled over into the broader equity and credit markets.

Fed easing this year could bring about the same fate to risk assets as in the late 1990s. When the Fed eased in 1998, investment-grade corporate bonds tightened by 40 basis points over a brief six-month rally, but then spreads entered a multi-year widening trend six months after the Fed eased. Today, the Bloomberg Barclays Corporate Bond index sits at a spread that is tighter than when the Fed eased in 1998, despite being of lower average credit quality. While the Fed’s pivot could bring about new record tights for corporates, this rally would be doomed to end painfully, similar to 1998. Further, history shows that spreads tend to widen, not tighten, when the Fed is easing.

The rally in credit is not being supported by fundamentals. We also cannot ignore the overwhelming technical variable of over $1 trillion in negative-yielding corporate debt globally, which is attracting non-U.S. investors to positive-yielding U.S. corporates. This is likely only the beginning of negative-yielding global corporate debt. As sovereign yields plummet further into negative territory, the added room for spread compression and the renewal of QE in Europe means that corporates could follow.

Still, our portfolios continue to prioritize capital preservation with a low weighting in investment-grade corporate bonds versus the benchmark and a preference for asset categories that we believe are credit-loss remote, including government guaranteed securities and senior CLOs.

This material is provided for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. This material herein contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions 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.
Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners and manages assets across fixed-income, equity, and alternative strategies. Our investment professionals perform rigorous fundamental and quantitative research to understand market trends and identify undervalued opportunities. We have an extensive track record of delivering innovative solutions by focusing on the needs of institutional and retail clients across a broad range of investment products and strategies.

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