People. Ideas. Success. How can fixed income investors meet their return objectives in a low yield world? January 2014

Transcription

1 People. Ideas. Success. The Credit Conundrum How can fixed income investors meet their return objectives in a low yield world? January 2014

2 PORTFOLIO STRATEGY RESEARCH Traditional Yield Strategiest Please see Disclosures and Legal Notice at end of Document 2

3 Monetary Policy Contributing to Scarcity of Yield Across Fixed Income Landscape With the Barclays U.S. Aggregate Bond Index at 2.5%, and each index subsector yielding less than 4%, investors face a scarcity of yield across the fixed income landscape While extending duration or adding leverage to meet yield objectives may prove successful in the near term, utilizing these investment shortcuts may carry significant long-term risks Historical Yield of the Barclays U.S. Aggregate Bond Index 20.0% Historical High Historical Low Current Historical Average 17.5% 15.0% 12.5% 10.0% 7.5% 5.0% 25% 2.5% 7.2% 2.5% 7.9% 78% 7.8% 6.4% 5.4% 5.3% 4.9% 4.3% 4.0% 3.3% 3.3% 2.4% 1.2% 14% 1.4% 17% 1.7% 0.0% Barclays Agg ABS Munis CMBS Treasuries Corporates Agency MBS Agency Bonds Sector Weight 100.0% 0.4% 4.3% 1.7% 35.5% 22.2% 29.8% 6.0% Source: Barclays. Data as of Historical average based on available Barclays data. For Barclays U.S. Aggregate and Agency MBS since January 1976; Treasuries, and Corporates since January 1973, ABS since December 1991, Munis and Agency Bonds since January 1994, and CMBS since July Please see Disclosures and Legal Notice at end of Document 3

4 Era of Return-Free Risk At current coupon rates, a 33 basis point rise in rates would lead to a negative total return over a one-year holding period With the risk in Treasuries heavily skewed to the downside, we believe Treasuries have gone from offering risk-free returns to now effectively becoming return-free risk U.S. 10-Year Treasury One-Year Holding Period Returns 25% 20% Total Return Nominal 15% 10% 5% A 33 basis point move in rates wipes away the total return in 10-year Treasuries 0% (150) (100) (50) % -10% -15% -20% Change in Interest Rates (Basis Points) Source: Bloomberg. The total return scenario is calculated based on the coupon rate of 2.75% and an effective duration of 8.6 years. Please see Disclosures and Legal Notice at end of Document 4

5 Extending Duration Has Led to Underperformance: 2013 YTD Returns As monetary policy is likely to continue influencing the performance of bond markets, optimal positioning on the yield curve has become paramount Longer maturity bonds, which exhibit the greatest sensitivity to interest rates, have underperformed, with large, negative total returns in YTD Total Return Performance Treasuries and Investment Grade Corporate Bonds, by Maturity 4% 1-3 Years 3-5 Years 5-7 Years 7-10 Years 10+ Years 2% 1.71% 1.38% 0% 0.36% 0.36% -2% -0.96% -4% -3.60% -2.88% -6% Barclays U.S. IG Corporate Index -6.04% -5.68% -8% Barclays U.S. Treasury Index -8.39% -10% Source: Barclays. Data as of Performance for 10+ year Treasuries excludes maturities greater than 20 years. Please see Disclosures and Legal Notice at end of Document 5

6 PORTFOLIO STRATEGY RESEARCH Monetizing i Complexity Please see Disclosures and Legal Notice at end of Document 6

7 Corporate Default Rates Remain in Line with Historical Averages Since 2010, annual default rates have remained in line with historical averages during previous non-recessionary periods Stronger balance sheets and sustained monetary accommodation should keep default rates low over the near term Historical High Yield and Senior Loan Default Rates 12.0% 10.0% Default Rates High Yield Bonds Senior Loans 10-Year High: 9.4% 9.6% 10-Year Low: 0.5% 0.2% Average (ex. Recession) 1.8% 1.5% Last: 1.4% 2.3% 9.4% 9.6% 8.0% 6.0% 5.5% 4.0% 4.3% 3.8% 20% 2.0% 0.0% 2.9% 2.6% 2.6% 2.0% 2.3% 1.6% 1.6% 1.8% 1.7% 14% 1.4% HY Avg. ex. recession: 1.8% 1.3% 1.0% BL Avg. ex. recession: 1.5% 0.7% 0.5% 0.7% 0.4% 0.2% Source: Credit Suisse. Default rates represent 12-month trailing default rates. Average default rates are from 2003 to 2013, excluding recessionary period between Data as of Please see Disclosures and Legal Notice at end of Document 7

8 Identifying Market Segments Where Investors can Create Value Smaller debt tranches offer significant yield pickup in high yield bonds and senior loans over similarly-rated, larger debt tranches Offers investors the opportunity to drive deal terms much less common in larger deals Barclays Corporate High Yield Index Size ($mm) Market Weight Yield to Worst < % 6.27% % 5.99% % 5.47% % 506% 5.06% % 4.98% >= % 5.18% Credit Suisse Leveraged Loan Index Size ($mm) Market Weight Discount Margin to Maturity < % % % 6.34% % % 487 >= % 450 Source: Barclays data as of Barclays Corporate High Yield Index excludes bonds trading at a price below 80. Please see Disclosures and Legal Notice at end of Document 8

9 Disclosures and Legal Notice Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: GS GAMMA Advisors, LLC, Guggenheim Aviation, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Investment Management, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners India Management, Guggenheim Real Estate, LLC, Security Investors, LLC and Transparent Value Advisors, LLC. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy or, nor liability for, decisions based on such information. This presentation is for informational purposes only and should not be considered as investment advice, a recommendation of any particular security, strategy or investment product or as an offer of solicitation with respect to the purchase or sale of any investment. This presentation should not be considered research nor is the presentation intended to provide a sufficient basis on which to make an investment decision. Although the information presented herein has been obtained from and is based upon sources Guggenheim Investments believes to be reliable, no representation or warranty, expressed or implied, is made as to the accuracy or completeness of that information. No representation or warranty is made by Guggenheim Investments or any of their related entities or affiliates as to the sufficiency, relevance, importance, appropriateness, completeness, or comprehensiveness of the market data, information or summaries contained herein for any specific purpose. The views expressed in this presentation are subject to change based on market and other conditions. There is no guarantee that Guggenheim Investments will make the investments as discussed herein. Individuals and institutions outside of the United States are subject to securities and tax regulations within their applicable jurisdictions and should consult with their advisors as appropriate. 2014, Guggenheim Partners, LLC. All Rights Reserved. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Guggenheim Partners LLC. Please see Disclosures and Legal Notice at end of Document 9