Guggenheim Partners said it thinks "leveraged credit is positioned to outperform in the next Fed tightening cycle," given its lower durations and higher yields relative to investment-grade corporate bonds and Treasuries.
In its latest April high-yield and bank loan outlook, the firm examined returns for fixed-income asset classes during the last Fed tightening cycle (2004-2006). During that period, high-yield corporate bonds and bank loans had higher annualized returns than investment-grade bonds and Treasuries.
Guggenheim attributes the outperformance to lower starting yields and higher durations for investment-grade bonds, intermediate Treasuries and agency bonds. Those instruments earned less than their starting yields, “as principal losses partially offset earned income.”