Credit yields in the next Fed hike cycle
This timely report explores the performance of leveraged credit during past episodes of Federal Reserve rate hikes and what to expect in this cycle.
NEW YORK, March 04, 2022 (GLOBE NEWSWIRE) — Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today released its outlook for high yield and bank lending for the first quarter 2022. Titled “Credit Yields in the Next Fed Hike Cycle,” the report explores the outlook for credit as the Federal Reserve (Fed) begins raising interest rates.
Among the highlights of the 13-page report:
Given mounting pricing pressures in the economy, there is growing urgency for the Fed to begin a rate hike cycle in 2022 and reduce the size of its balance sheet.
While the situation in Ukraine remains a wildcard, we now expect the Fed to hike at least four times this year, with the risk of bigger or more frequent hikes if inflation data continues to heat up.
Credit investors need not fear a Fed tightening cycle, since rate hikes typically occur when growth is strong and defaults are low.
We believe that leveraged credit continues to provide an attractive opportunity for bond portfolios as the Fed is about to begin withdrawing its accommodative monetary policy. Both sectors exhibit characteristics that may support returns as the Fed raises interest rates, namely spread compression in high-yield companies and floating coupons in bank loans.
History shows that high yield corporate bonds have outperformed loans in recent tightening cycles, mainly due to spread compression.
The recent backing up of credit spreads has now added some upside potential to corporate bond yields, which evens out the positive return potential between bank loans and high yield companies.
Rating upgrades present an attractive value proposition in both sectors.
The variable rate coupon of bank loans should increase in line with the general evolution of short-term interest rates and dampen their performance.
We slightly favor bank loans mainly due to their low duration profile and wider discount margins which leave room for spread compression.
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About Guggenheim Investments
Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with over $271 billion1 of total assets in bond, equity and alternative strategies. We focus on the return and risk needs of insurance companies, private and public pension funds, sovereign wealth funds, endowments and foundations, consultants, wealth managers and high net worth investors. Our more than 260 investment professionals conduct rigorous research to understand market trends and identify undervalued opportunities in often complex and under-tracked areas. This approach to investment management has enabled us to offer innovative strategies offering opportunities for diversification and attractive long-term results.
1. Guggenheim Investments assets under management are as of 12/31/2021 and include leverage of $20.7 billion. Guggenheim Investments represents the following affiliated investment management companies: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment 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.
Investing involves risk, including possible loss of principal. The potential impacts of the COVID-19 outbreak are increasingly uncertain, difficult to assess and impossible to predict, and may result in significant losses. Investments in fixed income instruments are subject to the possibility that interest rates will rise causing their value to decline. High yield, unrated debt securities have a higher risk of default than investment grade bonds and may be less liquid, which may increase volatility.
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This material contains the opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its affiliates. The opinions contained in this document are subject to change without notice. Forward-looking statements, estimates and certain information contained herein are based on proprietary and non-proprietary research and other sources. The information contained herein was obtained from sources believed to be reliable, but the accuracy of which is not guaranteed. Past performance does not represent future results. There is no representation or warranty as to the current accuracy of decisions based on this information, nor any liability for it. No part of this material may be reproduced or referred to in any form without the express written permission of Guggenheim Partners, LLC.