Guggenheim Investments Predicts Rate Cuts as Bond Market Faces Turmoil

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Guggenheim Investments is urging investors to look beyond the chaos in the bond market and prepare for the Federal Reserve’s potential shift towards rate cuts.

The investment team acknowledges that the Fed will likely keep its policy rate steady at a historic high of 5.25% to 5.5% during upcoming meetings. However, they also believe a recession is looming in the first half of 2024.

Given this backdrop, Guggenheim economists anticipate a swift pivot by the Fed towards rate cuts. They predict that rates could be slashed by approximately 150 basis points next year, with further cuts expected in 2025.

“We expect the Fed to bring the fed funds rate below 3% and halt balance-sheet runoff during what we believe will be a mild recession,” stated Matt Bush, a U.S. economist at Guggenheim, in a recent client podcast.

Just last week, Fed Chairman Jerome Powell hinted that the surge in longer-term Treasury securities may be contributing to inflation mitigation, sparking hope that additional rate hikes may not be necessary in this cycle.

However, in a surprising turn of events, the 10-year Treasury yield tumbled last week from its recent peak of 5%, only to bounce back on Monday. This volatility echoes the market turbulence experienced throughout 2023, which has kept both the Fed and investors on high alert.

As uncertainty continues to grip the bond market, Guggenheim Investments advises investors to be vigilant and prepare for potential rate cuts by the Federal Reserve.

Investment Opportunities in Credit Markets

In the current financial landscape, our team has found attractive investment opportunities in various areas of the credit markets. Agency mortgage-backed securities offer a potential return of approximately 6%, while structured credit presents a promising yield of around 8% to 9% on A-rated debt. Additionally, segments of BB-rated high-yield assets provide an estimated return of about 9%. It is important to note that all these investments fall within the higher-quality spectrum of credit.

Keeping Dry Powder

Despite these favorable opportunities, our portfolio manager, Adam Bloch, highlights the team’s cautious approach. While the team recognizes the potential for even greater returns by reaching further down the capital structure, they believe that the current compensation does not adequately compensate for the additional risk. As a result, they are keeping 20%-30% of their investments in “dry powder” to be deployed opportunistically during times of market stress.

Guggenheim Partners: A Trusted Parent Company

Guggenheim Partners, our parent company, manages a substantial $218 billion across fixed-income, equity, and alternative strategies. This robust platform enables our team to diligently analyze and uncover compelling investment opportunities for our clients.

Seizing the Opportunity

Navigating the fixed-income market has undoubtedly been challenging, but it has also presented unique opportunities. Similar to a farmer discovering fertile land amidst a burned-out forest, we are focused on capitalizing on these opportunities. Our primary objective is to lock in the exceptional yield levels currently available while ensuring risk is appropriately managed. We believe that this is the prudent approach for investors as well.

Stock Market Resilience

On a separate note, it is worth mentioning that the stock market continued its impressive rally on Monday. The Dow Jones Industrial Average (DJIA) and the S&P 500 (SPX) extended their winning streak to six consecutive sessions, which represents their longest run of gains since June and July. Similarly, the Nasdaq Composite (COMP) achieved its seventh consecutive day of gains, showcasing the market’s resilience.

In conclusion, while fixed-income markets remain challenging, our team is committed to identifying and leveraging attractive investment opportunities within the credit markets. By employing a prudent approach and capitalizing on record-high current yields, we aim to deliver favorable outcomes for our clients.

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