Today, economic fundamentals in the United States are as strong as they have been since 2011. One would expect, therefore, that bond yields would rise and equities would rally. Instead, recent turmoil in emerging market countries has led to lower Treasury yields and a sell-off in U.S. equities.
Now, with the 10-year Treasury yield sitting at about 2.67 percent, there is probably more risk that interest rates will decline further rather than rebound over the short-term. However, the window for bond prices to rise is limited, so selecting credits carefully is key. Over the longer term, improving economic fundamentals in the United States will ultimately drive interest rates higher.
The indicators that I typically follow do not suggest that we have established a major top in the U.S. stock market. The current sell-off feels more like a healthy correction, the first since the last major correction in 2011. I am somewhat surprised by the timing of the latest rout, given the typical seasonal strength in January and February, but the U.S. Federal Reserve is finally letting markets self-correct after years of intervention since the 2008 financial crisis. We will likely look back on this time as an opportunity to buy.
Historically, rising equity prices have been associated with falling bond prices (rising bond yields), as stronger economic fundamentals drove investors to stocks and away from bonds, and weaker economic growth produced the reverse. However, over the past few years, equity and bond prices began moving together as both markets were inflated by floods of liquidity from accommodative U.S. monetary policy, which distorted the traditional relationship. After tapering of quantitative easing by the U.S. Federal Reserve was first suggested in mid-2013, markets began returning to more normal correlations, driven not by expectations of continued quantitative easing, but by the economic outlook.
Source: Bloomberg, Guggenheim Investments. Data as of 1/31/2014.
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2014, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.
The U.S. Federal Reserve’s rate rise history reveals a familiar dilemma—previous delays led to inflated asset prices and recessions.
Risk assets—particularly high-yield bonds and bank loans—are well positioned to enjoy a prosperous road ahead.
While volatility in credit markets may not yet be over, we believe now is the time to look for high-yield and bank loan investment opportunities.
Your browser does not support iframes.
© 2015 Guggenheim Partners, LLC. All rights reserved. Guggenheim, Guggenheim Partners and Innovative Solutions. Enduring Values. are registered trademarks of Guggenheim Capital, LLC.