We offer some roadmaps for what investors can expect as a recession approaches and some ways to prepare.
NEW YORK, Aug. 24, 2022 (GLOBE NEWSWIRE) — Guggenheim Investments, the global wealth management and investment advisory firm of Guggenheim Partners, today released its High Yield and Bank Credit Outlook for the third quarter of 2022. The report, titled “Credit Yields Look Attractive Despite Rising Risks of Recession,” examines opportunities for credit investors at a time of rising yields for both high-yield corporate bonds and leveraged loans.
Among the highlights in the 16-page report:
- Though risk assets staged a solid recovery in July, there are concerns that aggressive US Federal Reserve (Fed) policies will trigger an economic recession in the United States, a risk rising with data showing persistent inflation, even if it did economic activity cools down.
- After the worst first half on record, when yields were down 14%, high-yield investors are understandably concerned. The same is true for leveraged loanholders, which fared better but were still down 4.4 percent.1
- The likelihood of a recession in 2023 is increasing significantly, but there are some signs that the recession may already be here.
- Ahead of the recession, we expect corporate earnings prospects to decline, credit downgrades to outnumber upgrades, and default activity to pick up from current lows.
- Strong balance sheets with a healthy liquidity profile and stable cash flows to cushion an economic downturn will be in demand.
- When dealing with downside risks, our approach is to select the best credits within industry silos, rather than avoiding cyclical industries altogether. For example, we found value in select stocks in the consumer discretionary space, which investors tend to avoid during recessions.
- We believe some companies in unpopular categories are able to weather a downturn because of their healthy liquidity profiles and stable cash flows, often stemming from existing long-term contracts or the bargaining power of issuers.
- High-yield corporate bonds are yielding nearly 8 percent and leveraged loan yields are nearly 9 percent.1 Both have traded at average returns of 6.3 to 6.4 percent since 2010.
- There have been few periods in the past decade when returns have been this strong, and many credit investors have later regretted missed opportunities.
For more information, visit http://www.guggenheiminvestments.com.
1. Source: Guggenheim Investments, Bloomberg. Total return data as of 6/30/2022. Yield data as of May 8, 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 $228 billion global wealth management and investment advisory division of Guggenheim Partners1 in total assets across fixed income, equity and alternative strategies. We focus on the return and risk needs of insurance companies, corporate and public pension funds, sovereign wealth funds, endowments and endowments, advisors, wealth managers and high net worth investors. Our 250+ investment professionals conduct in-depth research to understand market trends and identify undervalued opportunities in areas that are often complex and overlooked. This approach to investment management has allowed us to offer innovative strategies that offer opportunities for diversification and attractive long-term results.
1. Guggenheim Investments assets under management as of 6/30/2022 include leverage of $18.3 billion. Guggenheim Investments represents the following investment management affiliates: 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 the possible loss of capital. Investments in fixed income instruments are subject to the possibility that interest rates could rise and their value could fall. High yield and unrated debt securities are subject to 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 collateralized loan obligations (“CLOs”), generally receive payments that are part interest and part principal. These payments may vary depending on the loan repayment rate. Some asset-backed securities may have structures that make their reaction to interest rates and other factors unpredictable, making their prices volatile and subject to liquidity and valuation risk. CLOs carry risks similar to investing directly in credit, such as B. 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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