Views From The Experts

James Michal
Senior Managing Director and
Portfolio Manager
Guggenheim Investments

For Fixed-Income Investors The Best Offense Is A Good Defense

If the mood of the market could be characterized in just one word, it would be “complacent.” U.S. investors have been largely indifferent to rising rates and the recently announced details from the September 20 FOMC meeting regarding the tapering of the Fed’s portfolio reinvestments. In fact, volatility has rarely been lower. Given where asset prices and spreads are, any surprise event could snap the market from its slumber, and it would have a long way to fall.

While we are still able to identify compelling risk-adjusted returns in the fixed-income market, we are paying close attention to areas in which bubbles may be forming. Everywhere, headwinds loom. On the economic front, disinflationary pressures are negatively affecting retail and retail-related sectors; we are seeing peak occupancy rates across all commercial real estate; and we are nearing or at peak auto sales. Some of these indicators could have broader economic consequences, and if nothing else could lead to weaknesses in their underlying industries and could reflect in asset prices.

So where to invest? In this environment, we recommend a barbell strategy with high-quality bonds on the long end, and floating-rate assets on the short end. But buyer beware: Many floating-rate fixed-income sectors, including CLOs, are at post-crisis tights, and equities are at all-time highs. High-yield corporate bonds are particularly at risk due to their relatively rich pricing, so we have continued to significantly reduce our exposure to that sector. Our bank loan allocation has also been reduced.

As our concern mounts that the market has become vulnerable to near-term shocks, we remain committed to our strategy of reducing credit risk and spread duration by moving up in quality wherever possible. Based on what is being priced into the markets, investors are simply not being compensated for risk. For now, defensive positioning is the most prudent course of action.

For more information, please visit www.GuggenheimInvestments.com/fixedincome or call us at 800.345.7999.

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, with more than $237 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 275+ 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 total asset figure is as of 6.30.2017. The assets include leverage of $11.3bn for assets under management and $0.4bn for assets for which we provide administrative services. 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, Guggenheim Real Estate, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.