We offer guidance on what investors can expect as the recession approaches, as well as ways to prepare.
NEW YORK, Aug. 24, 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 third quarter 2022. Titled “Credit Yields Look Attractive Despite Rising Recession Risks,” the report explores opportunities for credit investors at a time when yields on high-yield corporate bonds and bond loans of leverage increase.
Among the highlights of the 16-page report:
- Although July saw a strong rally in risk assets, a looming concern is that aggressive Federal Reserve (Fed) policy will trigger an economic recession in the United States, a risk that is increasing with data showing stubbornly persistent inflation as even as economic activity cools.
- After experiencing the worst first half on record, when returns were negative at 14%, high yield investors are understandably anxious. The same is true for holders of leveraged loans, which performed better, but still declined by 4.4%.1
- The likelihood of a recession in 2023 increases significantly, but there are signs that the recession may have already arrived.
- As the recession approaches, we expect the corporate earnings outlook to decline, more downgrades than upsides, and default activity to rise from its current low. .
- Strong balance sheets that exhibit a healthy liquidity profile and stable cash flows to cushion a decline in economic activity will be in demand.
- As we navigate downside risks, our approach is to select the best credits within sector silos rather than avoiding cyclical sectors altogether. For example, we found value in some stocks in the consumer cyclical space that investors tend to avoid during recessions.
- We believe that some companies in disadvantaged categories are well positioned to survive a recession due to their healthy liquidity profiles and stable cash flows, which often come from long-term contracts in place or the bargaining power of transmitters.
- High yield corporate bond yields are nearly 8% and leveraged loan yields are nearly 9%.1 Each has traded at average yields of 6.3-6.4% since 2010.
- There have only been a few periods in the past decade when returns have been this high, and many credit investors have since regretted missed opportunities.
For more information, please visit http://www.guggenheiminvestments.com.
1. Source: Guggenheim Investments, Bloomberg. Total return data as of 30.06.2022. Yield data as of 8.5.2022. High yield corporate bonds are represented by the ICE BofA US High Yield Index. Leveraged loans are represented by the Credit Suisse Leveraged Loan Index.
About Guggenheim Investments
Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with over $228 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 250 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 deliver innovative strategies that offer opportunities for diversification and attractive long-term results.
1. Guggenheim Investments assets under management are as of 06/30/2022 and include leverage of $18.3 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 Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC and Guggenheim Partners India Management.
Investing involves risk, including possible loss of principal. Investments in fixed income instruments are subject to the possibility that interest rates will rise causing their value to decline. High yield and unrated debt securities have a higher risk of default than investment grade bonds and may be less liquid, which may increase volatility. Investors in asset-backed securities, including mortgage-backed securities and loan-backed obligations (“CLOs”), generally receive payments that are partly interest and partly repayment of principal. These payments may vary depending on the repayment rate of the loans. Certain asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. CLOs bear risks similar to direct investment in loans, such as credit, interest rate, counterparty, prepayment, liquidity and valuation risks. Loans are often below investment grade, may be unrated, and typically offer a fixed or variable interest rate.
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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 its accuracy 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.