Guggenheim Investments believes investors should look beyond the bond carnage and prepare for the Federal Reserve to move toward rate cuts.
Although the investment team expects the Fed to leave its benchmark rate unchanged at a 22-year high between 5.25% and 5.5% over the next few meetings, it also believes that a recession is likely in the first half of 2024.
This context could trigger a rapid shift by the Fed “towards rate cuts, ultimately reducing them by about 150 basis points next year and more in 2025,” Matt Bush, US economist at the Guggenheim, said in a podcast customer published Monday.
“We got them to lower the federal funds rate a little below 3 percent and suspend the balance sheet runoff in what we think is a recession, however mild,” Bush said.
Fed Chairman Jerome Powell signaled last week that the recent sharp rise in longer-duration Treasury securities may be partly responsible for the central bank’s inflation-fighting efforts, raising hopes that there may be no need to raise additional rates in this cycle.
However, in a turnaround, the 10-year Treasury yield BX:TMUBMUSD10Y fell sharply last week from a recent high of 5%, before rebounding on Monday, mimicking the Treasury market’s earlier volatility of 26,000 billion dollars that kept the Fed and investors on their toes. toes in 2023.
In this context, the team prefers agency mortgage-backed securities that yield around 6%, structured credits that start at 8% to 9% on A-rated debt, and BB-rated high-yield segments. offering around 9%, all of better quality. parts of the credit markets.
“Frankly, we’re not paid enough to go deeper into the capital structure,” said Adam Bloch, a portfolio manager on Guggenheim’s total return team, adding that they kept 20% to 30% of “dry powder” on most of their activities. strategies to take advantage of any upcoming stress.
Parent company Guggenheim Partners has approximately $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 the fixed income markets and across the entire yield spectrum,” Block said, while adding that “It’s a much like the farmer who stumbles upon a burned forest after a forest fire, and all he sees is farmable land.
“We’re focused, again, on securing these record current returns, and we broadly believe that’s what investors should be doing as well.”
The stock market rebounded for a sixth straight session on Monday, with the Dow Jones Industrial Average DJIA and S&P 500 SPX posting their longest streak of gains since June and July, while the Nasdaq Composite COMP posted its seventh straight day of gains.