Guggenheim Investments thinks investors should look past the carnage in bonds and gear up for the Federal Reserve to pivot to rate cuts.
While the investment team expects the Fed to leave its policy rate unchanged at a 22-year high of 5.25% to 5.5% over the next several meetings, they also see a recession as likely in the first half of 2024.
That backdrop could spark a quick Fed pivot “to rate cuts, ultimately cutting rates by around 150 basis points next year and more in 2025,” said Matt Bush, U.S. economist at Guggenheim, in a client podcast published Monday.
“We have them taking the fed funds rate down a bit below 3% and pausing balance-sheet runoff in what we think will be a recession, albeit a mild one,” Bush said.
Fed Chairman Jerome Powell last week signaled that the sharp rise in longer-duration Treasury securities recently might be doing some of the central bank’s inflation fighting for it, sparking hopes that there might not be a need for additional rate hikes in this cycle.
In a twist, however, the 10-year Treasury yield
fell sharply last week from a recent peak of 5%, before rebounding on Monday, mimicking earlier volatility in the $26 trillion Treasury market that has kept the Fed and investors on their toes in 2023.
With that backdrop, the team likes agency mortgage-backed securities returning roughly 6%, structured credit kicking off about 8% to 9% on A-rated debt and segments of BB-rated high-yield offering about 9%, all higher-quality parts of credit markets.
“We’re frankly not getting paid enough to reach further down the capital structure,” said Adam Bloch, a portfolio manager with Guggenheim’s total return team, adding that they are keeping 20%-30% in “dry powder” across most of their strategies to take advantage of any stress ahead.
Parent company Guggenheim Partners has about $218 billion in assets across fixed-income, equity and alternative strategies.
“It’s obviously been very painful to get to the point where we are today in fixed-income markets and across the yield spectrum,” Block said, while adding that “It’s kind of like the famer who stumbles upon a burned-out forest after a wildfire, and all he sees is farmable land.”
“We’re focused on, again, locking in these record-high current yields, and we broadly think that’s what investors should be doing, too.”
The stock market rallied for a sixth straight session on Monday, with the Dow Jones Industrial Average
and the S&P 500
booking their longest streak of gains since June and July, while the Nasdaq Composite
scored its seventh consecutive day of gains.