Macro Markets Podcast Episode 61: Fixed-Income Investing in 2025—the CIO’s Playbook in a Time of Change
Anne Walsh, Chief Investment Officer for Guggenheim Partners Investment Management, joins Macro Markets after the Fed’s December rate cut to discuss her 2025 economic outlook, and how she navigates heightened uncertainty amid potentially sweeping changes in government policies that could significantly affect economic growth, inflation, and the outlook for certain sectors.
This transcript is computer-generated and may contain inaccuracies.
Jay Diamond: Happy holidays. And welcome to Macro Markets with Guggenheim Investments, where we invite leaders from our investment team to offer their analysis of the investment landscape and the economic outlook. I'm Jay Diamond, head of thought leadership for Guggenheim Investments, and I'll be hosting today. Now as we enter 2025, we see a number of potentially market moving transitions on the horizon. The Fed lowered its policy rate at the December meeting by 25 basis points and indicated that they may be done cutting next year. The U.S. economy appears on track to avoid recession, but inflation remains stubbornly above the Fed's 2% target. And the incoming presidential administration promises to usher in potentially sweeping new changes in regulatory, trade and tax policies that could significantly affect economic growth, inflation, and the outlook for investing in certain sectors. Now here to discuss how to navigate this environment is Anne Walsh. Anne is chief investment officer of Guggenheim Partners Investment Management and a managing partner of Guggenheim Partners. She leads our investment team, which is responsible for more than $249 billion in assets under management, on behalf of our clients. Anne, welcome back and thanks for taking the time to chat with us today.
Anne Walsh: Thanks, Jay, and thanks to all of you listening.
Jay Diamond: So let's start with the Fed decision. As widely expected, the Fed cut its policy rate 25 basis points at its December meeting. How much further do you expect the Fed to go?
Anne Walsh: Well, it is interesting because when Jay Powell, during his press [conference], talked about how actually diverse the opinions were of the voting members relative to actions in 2025. You get a sense that they're less inclined to cut rates because they're concerned about inflation being too high and maybe stubborn and GDP being too strong. We are, interestingly enough, maybe a nonconformist point of view, believing that we could still see as many as four rate cuts next year. Now, the pace of those rate cuts is expected to slow, so more on a quarterly basis. We really don't see a January rate cut at this point in time. But let's remember that the Fed is model driven and the Taylor rule model built by John Taylor, a professor at Stanford, suggests that the neutral rate of Fed funds is somewhere in the mid 3 percent level. Maybe, you know, 350 to 375. Well, we've got a long way to go to get there. And so, as a result, we tend to believe that over the course of the 2025, we're going to see this trajectory of rates continuing their slow descent down.
Jay Diamond: And is our base case still that we're in for a soft landing?
Anne Walsh: Well, let's define a soft landing. So, we believe that we're in for what I would call less than trend growth. So if GDP trend over the long period of time is 2%, we believe that below trend growth is somewhere between 0 and 2%. Now, if we look back in history to say, 2023, we were in the camp of believing that there was going to be a recession. Well, we were half right because half of the U.S. economy was and remains in a recession. By the way, that had a big influence on the elections that we just saw. And, so we were half right. But where we are, right now is the totality of the economy is coming in somewhere in that, we'll call it 1 to 2% level. You can call that a soft landing. That's probably not a bad title for it. But I would simply refer to it as a future of below trend growth.
Jay Diamond: Nevertheless, we have seen a tremendous amount of bullishness, in risk assets, particularly equity markets. Do you think that this confidence is justified or misplaced?
Anne Walsh: Well, it's interesting about the equity market. So post-election we've seen obviously a very significant run up in equities. And over the last two years we've seen the S&P 500 advance right up 50 percent approximately. It's a tremendous amount of bullishness. The equity risk premium in the marketplace is basically zero. And so as a result what we have is we have a market that is priced to perfection. Now you get an announcement like yesterday, with Jay Powell, talking about the rate trajectory and inflation. And of course, we see a huge sell off because we're priced to perfection and because we pulled forward a great amount of return, post-election. I think you're seeing that the market is concerned about the sustainability, and the place I would spend a lot of time thinking about with regard to equities would be future earnings. So when you're priced to perfection, earnings have got to perform at the level that's expected in order to be appropriate for the elevated amount of a price-to-earnings multiple that we have on the equity markets right now.
Jay Diamond: You know, in, equities, we talk about price earning multiples and in bonds we talk about credit spreads, which are also tightening. Are those priced for perfection or is there rationale for tight spreads right now?
Anne Walsh: Well, relative to history, I would say spreads are very tight for the spread sectors, whether that's corporate, or structured credit or whatever sectors we're talking about. However, if you look at the supply and demand, the actual level of issuance for a very high level of demand for bonds is actually waning. And so, what we're seeing is the biggest issuer, ding ding ding, is the federal government. And as long as deficit spending continues at the rate that it is and the rate that we expect it to remain going, as a result we would expect to see that continue. $2 trillion of deficit spending means we're going to see more Treasurys. So on a relative basis, while spread sector issuance is, as I said, waning relative to rates and Treasurys which are continuing to be at elevated levels of issuance, you end up with this paradigm that just simply suggests spreads are tight and could remain tight for the foreseeable future, absent some sort of very significant risk-off trade that, frankly, we really don't see. Right now you have good, strong fundamentals in corporate credit and structured credit. And as a result, the support is there, to validate it on a fundamental basis that spreads remain tight. And, and so I think that's a very strong positive for the spread sectors in fixed income.
Jay Diamond: You mentioned before that we might be a little, off market in thinking that there will be more cuts than fewer in 2025, which suggests that you believe there's some downside risks to economic growth and inflation. Can you elaborate on what you what you're thinking there?
Anne Walsh: You know, we don't spend quite as much time talking about what's going on outside the U.S. as we do certainly within the U.S. And right now, the U.S. story is a very strong one. We have the highest level of growth. Maybe a few other countries, like India is doing great, especially the beneficiary of the challenges that China has right now, for example. But outside of a few pockets globally, the rest of the globe, particularly in the developed economies, is really slowing down. We see that Germany is in a recession and has been for a while. So, Europe is stagnant and also has a lot of structural problems. Canada is slowing. The UK is sort of in a stagflation area environment right now. Japan, while they are certainly growing relative to history, they are by no means, in a strong position at this point. And then you have China, which is still in financial disarray, and it's going to take them a long time to escape that. So as a result, what we see is, is that the U.S. is a very strong story. But historically, one strong economy is hard to remain strong by itself when there's a very big gravitational pull from weakening economies globally. So, I think that some of the risks that exist are going to come from outside the borders of the U.S., talking about the those economic impacts, but also geopolitical. And what we're seeing is previously stable governments are now engaged in some level of turmoil, whether it's France, post elections, or whether it's South Korea. So there could be a lot of noise and risk in this system. So there's downside risks. I like to say, that, you know, there's not a big black swan event that I see coming, and I think that's good. Areas that I tend to focus on are leverage and liquidity. Either too much leverage and/or not a lot and not enough or sufficient liquidity. And right now, that's not the fundamental story in the U.S. So I don't see one big black swan out there. But I do see tail risk is elevated because of these elements that I've talked about, a lot of it from outside the U.S, and we still have a fairly tight, believe it or not, rate story. So right now, as the Fed's lowering rates that's great, but it still has had a very significant impact—these elevated rates—on the rate sensitive parts of the economy, whether that's real estate or whether that's consumers who have to pay very high APR charges on their credit cards or what have you. There's still rate sensitivity in the system that is going to take longer now that the Fed's trajectory on lowering rates has slowed. So there's still some elements that we have to get through before we're going to see that really great tailwind. And so as a result of these elevated but idiosyncratic risks, we are very diligent and vigilant with regard to risk management.
Jay Diamond: So, one thing you didn't mention was potential policy with the incoming administration, which on the one hand, some could be quite bullish for the government, for the economy, but on the other could be more of a problem. How does that play into your overall, perspective on the future market?
Anne Walsh: I certainly can't leave aside what's going to happen in Washington. And we're going to see a game of badminton between politics and policy. And what do I mean by that? Everything is going to cause some volatility, with regard to investors. So we're going to see a lot of volatility in 2025. We're starting out right now. We haven't even been you know, we haven't even seen the inauguration. And there's already discussion in Congress as to how they're going to engage in getting policy enacted. Whether that's through reconciliation bills, one, or two, what impact Doge will have on spending. Right now they're even talking about, you know, just getting a budget passed and already that's in turmoil. So we're going to see a very significant amount of narrative that's going to be market moving on a virtually a daily basis. So, you know, strap in, put the seatbelts on because here it comes. Immigration, tariffs, taxes, you name it, we're going to see, and by the way, the cabinet, to the extent that the cabinet gets confirmed, that's going to be another series because that's going to take a while. The particular nominees that Trump has placed into contention for these roles have very specific mandates to disrupt their responsibilities. That's going to be significant. So there's going to be a lot of movement in a way that those of us in the investment world have a history of looking as monetarist, usually thinking about the Fed as almost a singular authority, or power, and policy is going to have a whole lot of market moving implications. Ultimately, what is also the impact on the deficit and the amount of spending that we're going to see that is coming forth, I already mentioned $2 trillion is the current deficit spending. You know, we could see it move down more. We could see it move up and that will have impact as well.
Jay Diamond: Talk to me a little bit about how you think the tariffs will play out.
Anne Walsh: I'm a little bit more cautious and thoughtful with regard to a blanket statement that tariffs are either A) automatically inflationary or that B) we're going to see across the board tariffs implemented day one by the Trump administration. They can be implemented by executive action. And what I would say about that is that Europeans, in particular, are very concerned about across the board tariffs. I would see us having fairly significant tariffs against China. That's a continuation of existing policy, so that's not going to be much of a change where we're going to see tariffs. I think they're going to be very targeted. EVs. Absolutely. But the economic objective, if you will, of China, tied with the manufacturing subsidies means that even with significant tariffs, they can probably sell those cars cheaper in the U.S. and in particular, Europeans are worried about this, in Europe, even with those heavy tariffs relative to domestic car manufacturing. But I would say more broadly, I think that the Trump administration is going to look at tariffs as a negotiating tool. And I really don't see us having like these broad swath tariffs. I believe these are opening gambits. So, I think this is going to be a very important and time consuming negotiation. And I don't think it's going to take place day one, as regards tariffs. I think these are going to play out over the next number of months. So investors who are assuming that inflation is going to happen as a result of tariffs in January, I think they might want to reset their calendar for a little bit later in the year to see the impact. I would say this with regard to Trump's policies, all of those, of the key, you know, foundational principles, is that it's going to take a little bit of time to see the real impact of these as time goes through the year. But, he also doesn't have a lot of time to deal with it because politicians, the minute they get inaugurated, the next thing they're thinking about is reelection and midterms will be two years away. So, there's this very sweet spot. There's a very narrow window to see these policies get enacted.
Jay Diamond: And he has a very slim majority.
Anne Walsh: Exactly. And that's going to be market moving because this is all going to be happening over the next, we'll call it 6 to 18 months.
Jay Diamond: Around the world, we've seen the incumbents get voted out of office. And a lot of those incumbents were in favor of policies that supported or benefited from globalization. So, I'm wondering if you thought about whether we're going to see a reversal of globalization and some of the deflationary or disinflationary benefits that that we all enjoyed from that? What happens with this new kind of global regime?
Anne Walsh: So deglobalization was probably already starting before Covid, and Covid accelerated it, as Covid accelerated many trends. One of the or maybe several of the factors that we learned about during Covid were that we had supply chains where we relied, for essentials, too much on one trading partner, in this case China, for the most part. Examples include medicines. Many of our critical medicines were being manufactured in China and we had no domestic production. I would say defense systems, we actually rely on China to produce defense, important, critical aspects of our defense products there; that doesn't seem to make a lot of sense strategically. So, it's important to think about deglobalization and friendshoring, if you will, and nearshoring, as both a strategic element but also one where we want to diversify our manufacturing chains. This trend accelerated post Covid, and it's going to accelerate even more under Trump's America First agenda. And to that end, there's going to be incentives to continue that. And it is a bit inflationary. Other parts of the build out that we're seeing, and these are global trends that are also, and I would use the word reflationary. By reflationary I don't mean 9 percent inflation again, which we had, of course, in the last two years; I mean, 3 or 4 percent inflation, kind of like the 1990s, but where we also had high levels of productivity. What are some of those trends? Artificial intelligence investment, power buildout, more energy buildout, whether that's fossil fuels or, you know, natural gas and also electric, and perhaps even nuclear. All of this reinvestment or investment is going to be somehow a little bit inflationary. It's also going to keep the investment in the U.S. high, jobs high. It means that the U.S. economy should continue to be one of the, if not the strongest economy, for quite some time relative to the other countries. And even though we have this sort of projection for some below trend growth, at the same time, this reinvestment is going to be happening. And so there's this future, for which we have a strong tailwind and this investment will be important for that as well. But there's costs associated with it. And so deglobalization, redefining supply chains, reinvestment in the U.S. in these critical areas, all of that movement, and also movement of capital will have a somewhat reflationary impact. If you ask me, am I short term thinking about that? Yes, I'm thinking about reflation in the short term. But long term I'm thinking about the growth benefits and what happens when a lot of this technology and this investment comes online and it's going to be very value add for the U.S. economy.
Jay Diamond: Well, that sounds like a big macro theme, Anne. And I know that we're working now on our outlooks for 2025 that we'll be publishing them in our Macro Themes. They're not published yet as we're talking, but can you give us a peek into some of the themes that you're thinking about with our Macro-Economic Research and Market Strategy group, to put together for our clients and prospects to read?
Anne Walsh: Sure. I already touched on a few of them. I will reiterate that, frankly, we're going to see this global realignment continue. And the new administration is going to create other opportunities as well as some risks. Depends on whether you're…. if you're an energy company, I think you're going to see some tremendous opportunity and deregulation. And that's also going to be happening in the financial sector as well. And then you have also, some risks, particularly, I guess, if you're an EV manufacturer or you're in an area where the administration feels like there's less investment that they'd like to support. Additionally, I think we're going to also see, quite a bit of difference in and how the government works, potentially. And that maybe for the first time in decades, we're going to see further U.S. investment in those critical areas, as I mentioned, infrastructure buildout, AI, technology, power, any of these very critical growth areas that will be growth engines for the future. I think we'll see the Fed be data dependent and so they're going to react to this new backdrop and try and adjust policy as needed. I, of course, you know, as I mentioned already, believe—we believe—that we're going to continue to see rates coming down as they move towards a neutral rate environment. And I think that another theme is we're entering into what I would refer to as a long term neutral rate environment. That means rates at the short end and, of course, the ten-year Treasury tend to move within a range. I think that pattern started two years ago. And it continues. If we look at the ten-year rate now, our range is somewhere between, we'll call it, you know, mid-threes to the mid-fours in terms of the ten-year rates of interest. And I think that as we get higher in that range and as markets react to, for example, the Jay Powell press announcement, then you know, you see an opportunity to extend duration when you get to the higher range in the to say 4.5 percent. And likewise, as rates move down, which I anticipate they will in the ten-year, you can also shorten duration and benefit there. So those are a few of the themes that we're going to be describing in more detail.
Jay Diamond: So, you've described a year of change, of transition. It'll be a really interesting year from a number of perspectives. And in some ways, it might even be the first of its kind that you've experienced in your career. But given this backdrop, how do you and your team approach portfolio strategy?
Anne Walsh: So, Jay, that's a really great statement you just made. And I make this observation, you know, we've had a 40-year bull market in bonds in the US. And then subsequently of course that has ended. And it is a new paradigm for investment. One we haven't been in. And as long as I've been in this industry many, many years, longer than many, I can tell you, this is a new paradigm and it is unique, this trading range that I speak of, this historical precedent. After bull markets come to an end, you don't automatically see a big shift. You kind of chop, which is where we are. And it can last. This pattern can last for a long time. It's a very good time to be an active investor, particularly in fixed income. Because, you see, idiosyncratic risk, the risks are spread more broadly, they're not as easily defined in singular areas. And also, dare I say it, it's not a bad time to be a fixed income investor because we actually have yield because of this, and I'll put this in air quotes, “normalization of rates.” We're really pretty much, where we are right now is about the long term average. If we go back on the ten-year for 200 years, we're really right around the range for the long-term average on the ten-year yields. The economy can do well at this level. Now, there are some rate sensitive parts of the economy, commercial real estate being one, that have been hit harder than others. And we're going to continue to watch that sector. But there could be some very good entry points even in commercial real estate. So in this environment, you know, you have to be a selective investor. Spreads are tight. We know that that risk is priced to perfection, in particular in equities. But I think that because of the way we operate and the way that we select securities, we can be both nimble and thoughtful with regard to deploying capital into these various parts of the market. And I think it's a good time to be an investor where you can get 5 percent plus yields and credit quality in fixed income. And so, you know, along with our deep research process, we think that we can find a lot of value in the coming months as we go through 2025 and take advantage of the volatility that is continuing in the marketplace right now.
Jay Diamond: I'm not going to ask you for ticker symbols or anything, but, in bonds, where specifically are you and your team finding value in this environment?
Anne Walsh: So areas that we like a lot, and that should perform well in this particular backdrop: investment grade credit of all types, structured credit, corporate credit, where fundamentals remain strong as I've mentioned. Additionally, even high yield, with regard to higher credit quality, in high yield, there's a bifurcation as you go down the credit spectrum. Private asset opportunities exist across any number of sectors. We are big managers in private debt. There's good opportunities there as banks exit lending. And there's an opportunity for investors like us to be able to find and source those great opportunities. Additionally, real assets. I mentioned, not all commercial real estate is bad. Some of it's really good and it's a good entry point. Yields are high and the opportunity to lend into that space is good. Additionally infrastructure. As I mentioned, this incredible buildout that's going to be happening across the U.S. presents opportunities for investment in data center technology, self-owned deployment, energy, you name it. There's going to be a tremendous amount of opportunity for investment there. So, you know, the world of opportunity exists for us as investors. And, of course, U.S equities, we’re very thoughtful there. Because again, over the longer term, I would anticipate the returns to level off back to a long-term average. Because that market is a bit overpriced at this point in time.
Jay Diamond: Anne, this has been a terrific time spent with you. And I know you're extremely busy as the year-end is approaching and there's a lot to get done before the books are closed, so I appreciate it. But before I let you go, if you could summarize main takeaways for our listeners, that they can take with them.
Anne Walsh: Well, maybe in just a few sound bites. Hey, it's a good time to be an active fixed income investor and to be an active manager in all sectors only because and especially because risks are elevated and differentiated across the spectrum. And I think, you know, I just want to also say thank you to our listeners. Thanks for being our partners and our clients and providing us support. 2024, notwithstanding volatility, was a good year and we look forward to 2025. So to all of you, thank you so much and happy, happy holidays.
Jay Diamond: Well thank you Anne, and happy holidays to you and your family as well. I hope you'll come back and visit with us soon. And thanks to all of you who have joined us for our podcast. If you like what you are hearing, please rate us five stars. Now, if you have any questions for Anne or any of our other podcast guests, please send them to MacroMarkets@GuggenheimInvestments.com, and we will do our best to answer them on a future episode or offline. I'm Jay Diamond and we look forward to gathering again for the next episode of Macro Markets in 2025. And in the meantime, for more of our thought leadership, please visit Guggenheiminvestments.com/perspectives. So long.
Important Notices and Disclosures
Investing involves risks, including the possible loss of principal. Stock markets can be volatile. Investments in securities of small and medium capitalization companies may involve greater risk of loss and more abrupt fluctuations in market price than investments in larger companies. The market value of fixed-income securities will change in response to interest rate changes in market conditions, among other things, investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their value to decline.
High yield securities present more liquidity and credit risk than investment grade bonds, and may be subject to greater volatility. Structured credit, including asset backed securities or ABS, mortgage backed securities and closer complex investments, are not suitable for all investors. Investors in structured credit generally receive payments that apart interest in part return of principal. These payments may vary based on the rate loans are repaid.
Some structured credit investments may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and subject to liquidity and valuation risk. Close bear similar risks to investing in loans directly, including credit risk, interest rate risk, counterparty risk, and prepayment risk. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.
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