Guggenheim's Fixed Income Sector Outlook

Guggenheim recently published its quarterly Fixed Income Sector Views report, providing insights into market trends, valuations, and investment opportunities across major fixed-income sectors. Here are some of the key takeaways, with a focus on private credit:

• The high-yield corporate bond market has returned over 6% year-to-date, buoyed by strong performance across most industries despite rising defaults. Guggenheim believes high-yield bond spreads have limited room to tighten further, but current yields around 8.4% continue to attract investors.
• Bank loan coupons are at 9%, the highest since 2001, contributing to a yield above 11%. After accounting for expected losses in an above-average default environment, Guggenheim believes the loss-adjusted yield of 5.6-7.6% remains attractive relative to alternatives like Treasuries.
• Within CLOs, Guggenheim favors senior tranches, given their more defensive credit profile. Underlying corporate loan fundamentals remain challenging, with net downgrades and defaults in CLO portfolios exceeding 2022 levels. This warrants a cautious approach to mezzanine and junior CLO tranches.
• Commercial ABS yields are more attractive than similarly-rated corporate bonds, with a spread differential around 120 bps. The niche ABS market tends to lag corporate spread tightening. Guggenheim sees value in securitized bonds backed by equipment leases, consumer loans, and other commercial collateral.
• The private credit sector offers a compelling yield advantage over liquid markets, but active credit selection is crucial at this point in the cycle.

In summary, Guggenheim's latest sector outlook highlights attractive yield opportunities in private credit markets for selective investors. Corporate bonds and loans provide yields not seen in over two decades, while niche ABS offers a complexity premium. However, with macroeconomic risks on the horizon, thorough credit analysis and active portfolio management will be key to realizing the income potential of private debt in the current market environment. For fixed income investors willing to take a discriminating approach, private credit continues to warrant a closer look.

Download the full report: https://www.guggenheiminvestments.com/perspectives/sector-views/q3-2023-fixed-income-sector-views