Fed likely to cut rates below 3%, making bonds attractive now, Guggenheim says

That backdrop could spark a quick Fed pivot “to rate cuts, ultimately cutting rates by around 150 basis points next year and more in 2025,” said Matt Bush, U.S. economist at Guggenheim, in a client podcast published Monday.

“We have them taking the fed funds rate down a bit below 3% and pausing balance-sheet runoff in what we think will be a recession, albeit a mild one,” Bush said.

Fed Chairman Jerome Powell last week signaled that the sharp rise in longer-duration Treasury securities recently might be doing some of the central bank’s inflation fighting for it, sparking hopes that there might not be a need for additional rate hikes in this cycle.

In a twist, however, the 10-year Treasury yield
BX:TMUBMUSD10Y
fell sharply last week from a recent peak of 5%, before rebounding on Monday, mimicking earlier volatility in the $26 trillion Treasury market that has kept the Fed and investors on their toes in 2023.

With that backdrop, the team likes agency mortgage-backed securities returning roughly 6%, structured credit kicking off about 8% to 9% on A-rated debt and segments of BB-rated high-yield offering about 9%, all higher-quality parts of credit markets.

“We’re frankly not getting paid enough to reach further down the capital structure,” said Adam Bloch, a portfolio manager with Guggenheim’s total return team, adding that they are keeping 20%-30% in “dry powder” across most of their strategies to take advantage of any stress ahead.

Parent company Guggenheim Partners has about $218 billion in assets across fixed-income, equity and alternative strategies.

“It’s obviously been very painful to get to the point where we are today in fixed-income markets and across the yield spectrum,” Block said, while adding that “It’s kind of like the famer who stumbles upon a burned-out forest after a wildfire, and all he sees is farmable land.”

“We’re focused on, again, locking in these record-high current yields, and we broadly think that’s what investors should be doing, too.”

The stock market rallied for a sixth straight session on Monday, with the Dow Jones Industrial Average
DJIA
and the S&P 500
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booking their longest streak of gains since June and July, while the Nasdaq Composite
COMP
scored its seventh consecutive day of gains.