Macro Markets Podcast Episode 66: Asset-Backed Finance: The Evolution of a Portfolio Mainstay
Karthik Narayanan, Head of Structured Credit, joins Macro Markets to discuss the evolution of asset-backed finance, the role it plays in a diversified fixed-income portfolio, and current market dynamics and opportunities.
This transcript is computer-generated and may contain inaccuracies.
Jay Diamond: Hi everybody 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, before we dive into our discussion of asset-backed finance, I have a bit of related news to share. Earlier this month, Guggenheim Investments was named the number one taxable bond fund family for 2024 by Barron's Magazine in its annual Best Fund Families rankings. Now, this was out of 48 fund families. This recognition, which we're very proud of, is actually the second consecutive year, and the third time in five years that we have been ranked number one. And these rankings are based on one-year relative performance. Now, the reason why this is related news is that one of the drivers of that performance has been our traditional overweight in structured credit. How about that for a segue? So here to demystify structured credit and discuss the evolution of the market and its role in our investment portfolios, is Karthik Narayanan, head of our structured credit team. So welcome back Karthik and thanks for taking the time to chat with us today.
Karthik Narayanan: Thanks, Jay. Happy to be back.
Jay Diamond: Well, let's level set. In basic terms, what are asset-backed securities which we also call structured credit here?
Karthik Narayanan: Sure. So I understand that there's a lot of acronyms and a lot of different definitions that are used for this. But I would like to just offer a few simple ideas I think that would help listeners, as you say, demystify and orient within the structured credit or ABS world. So at a high level, asset-backed securities or ABS, they're bonds, they're debt instruments that are backed by a large pool of assets that get paid back by contractual cash flows, and they also have collateral in the form of assets. So, you have secured lending subject to rules and tests to protect bondholders and underlying that are cash flows and assets. They could involve auto loans or residential mortgages, aircraft leases. But the principal idea it is the investor is lending money on the pool of assets that are being paid back from the cash flows that are generated on these assets and underlying contracts. So to summarize, what we're talking about is a form of tradable secured lending debt instruments that are backed by packages of assets that are then tranched into different tranches with different ratings that each have different levels of risk and return. And then that allows investors to choose the level of risk that they're comfortable with and then for the sponsor or the issuers standpoint, allows for an efficient access and pricing within a capital market.
Jay Diamond: It's worth spending another minute or two on terminology. We've been hearing some other terms in the market lately that have been gaining currency. So how do asset-backed securities differ from asset-based lending or asset-backed finance?
Karthik Narayanan: So the easiest way to think about it is that asset-backed finance is the broadest umbrella of secured lending. And so this describes basically any arrangement where an asset owner, say you own financial contracts, you own a bunch of mortgages, etc. they're pledging assets as collateral. These assets have to generate cash flows for it to be asset backed and borrow money against that collateral. So we stop right there, we've cracked code and defined all of asset-backed finance. Now if we then start asking more detailed questions about are these financings tradable instruments, what kind of information are we getting? Who's on the hook for verifying the collateral as the financing transaction is getting set up and whether the data is accurate? Then you have to make some further distinctions. So to keep it simple, if we're talking about non traded instruments, where highly specialized investors with their own analysts and legal teams doing their own underwriting, or with a lot of customized disclosure and information, that's one end of the spectrum. But this is not—it’s a spectrum—it’s not a binary. Now, on the other end of the spectrum, we're talking about instruments that trade through broker dealers, can be readily sold, can be held by a wide variety of investors, and have standardized albeit more limited reporting. Then we're talking about asset-backed securities. So there's sort of a distinction between the loan and the security. But all of them have this, common attribute of being secured debt instruments that are backed by contractual cash flows and assets. Hopefully that helps sort of demystify and simplify some of the jargon out there.
Jay Diamond: I think it does. So, let's talk a little bit about, how the asset-backed market has transformed over the years. Let's start in the 1980s, when the market really started to broaden and standardize.
Karthik Narayanan: Sure. So structured finance, all these technologies have been around for a while since the mortgage-backed securities of the 80s, to the early days of ABS in the 1990s, onto the GFC and then sort of accumulation of all the different twists and turns of history to get us to where we are today. I would offer that the market has had four broad phases. The first is the serialization phase. Then came the speculation phase, the normalization phase, and then now what we would call the disintermediation phase. So to go back a bit into history. The first stage was the serialization stage. This was all about proving the proof of concept and standardizing terms and structures for any asset backed or collateralized secured debt instruments to gain acceptance in the capital markets as an alternate source of funding to banks. Now recall, this is back in the 80s and 90s, and there were a whole lot more banks around in that time period than there are today. So even if you just say from 1985 to 1995, this kind of early days period, there were between 10 and 15,000 commercial banks in the U.S., and there's something like 4,000 or 4,400, something around there today. So during this time period, agency mortgage-backed securities are a good example of the serialization, agency MBS, as well as CMOS backed by agency MBS, were great examples of this, and they were very successful by standardizing the terms and gaining access to capital markets as an alternate to what was the dominant form of financing, which was through banks. And then you get into the 90s, you get the early days of ABS. And again, in this time period, the focus was on standardization, serialization, and a lot of the emphasis was on credit cards, auto loans. And these are classically assets that were held by banks. And banks were oftentimes the issuers that were just looking for a diversified source of funding in the capital markets.
Jay Diamond: The serialization and standardization phase was followed by the speculation phase. So tell us a little bit about what characterized that phase.
Karthik Narayanan: In the speculation phase, this came after the serialization phase, we saw rapid market growth and excesses in certain areas. Part of that was driven by deregulation and increased complexity of asset classes, increased participation of levered investors. And then the one part that I think, doesn't get a lot of airplay, but that is there's sort of limited information and analytical coverage on a lot of these complex assets, a lot weaker than there is today. And so even if investors were doing very rigorous work at this point, it was much more limited because the tools were not available. Now I'm not saying this is this, you know, by any means the prominent cause of the problems of what came next. But it's just a characteristic of this time period, where the complexity of the assets far outweighed the analytical sophistication available in the market. And as our listeners know that a lot of this excess speculation was in one particular area, which was real estate. And, you know, it wasn't sort of as widespread to affect the entire economy directly, although through the banking system, it had knock on effects when things unraveled next. But really, I want to point out that you had very high leverage in sort of a single asset type that was prominent part of the growth.
Jay Diamond: Great and other parts of the asset-backed market performed relatively well during the crisis.
Karthik Narayanan: Yeah. The really excessive speculation was in real estate. And therefore, when you zoom out and look at the other parts of the ABS market that existed at that time, they all did pretty well. And, you know, they didn't have some of these attributes of, you know, excessively complex structures and sort of lending on assets at their peak valuation. And so they performed relatively well and certainly much, much better than what you saw in, commercial real estate, residential mortgages.
Jay Diamond: So, tell us what happened after the speculation phase.
Karthik Narayanan: So as our listeners know, the music eventually stopped. And that kicked off what I would call the normalization phase, where large amounts of risk needed to change hands out of very levered investment vehicles, more to what we would call real money investors. That was a multi-year process. And, at the same time, underwriting standards became tighter, bank capital requirements and regulatory scrutiny tightened. And all this took a long period of time during this normalization phase. Now, the one interesting thing about this time period, and this is basically 2009 to, let's say the mid 20-teens, one thing that’s interesting is you had a big shift in people that were previously involved in bank acquisition or distribution of risk. So they may be bankers or structuring folks or other professionals in the Wall Street ecosystem during this time period, a lot of them moved to the buy side or investment management. And a lot of that brain transfer was going on during this time period. And the second point during, you know, that's maybe less well appreciated, is there was also a large boom in analytical capabilities when looking at structured credit during this time period. So, you know, we all know that lots of, you know, dented up mortgages needed to change hands out of banks and levered SIVs and other vehicles into real money investors, credit funds, insurance companies, money managers, etc. But in addition to that, a lot of people moved also during this time period, and a lot of platforms were created in the investment management world to deal with these distressed assets. But as new assets became less distressed over time and, you know, normalized, as we're calling it, that capacity could be redeployed into other areas of structured finance. So, I think that kind of sets the stage for what happened next.
Jay Diamond: So let's talk about what happened next. If I'm keeping track, this brings us to the current phase in the development of the ABS market, which I think you called the disintermediation phase.
Karthik Narayanan: That's right. This brings us up to the current point that changes in regulations with banks have reduced their ability to hold assets and trade assets, and it's really altered their historical role as providing warehouse financing, aggregating assets, and conducting syndication to generate term financing on these assets for the long term. A lot of those functions have really moved to the buy side, where investment managers are taking on additional parts of that intermediation chain, really driven by this change in financial regulations as well as all the brain trust that's sort of built up on the buy side in the aftermath of the GFC. And this really brings us to where we are today, where there's a greater diversity of assets being financed through asset-backed securities and, you know, asset-backed finance more broadly. And a lot of that was being conducted, with a smaller involvement of banks. And that's really the hallmark of this phase we're in now.
Jay Diamond: So we are seeing the market is growing. What do you attribute that to?
Karthik Narayanan: That's right, Jay, the market is growing. You know, I don't know that the market is growing at the rate that news headlines are growing. You know, just growing in the sector. But, you know, if you look at issuance in structured finance, overall, structured credit overall last year is about $1 trillion. That's about where it was around 2003 or 2004. And if you just look at asset-backed securities specifically, issuance last year was something like $300 billion and that's about what it was 20 years ago. So certainly not an explosion, but we are seeing, sort of growth, as you say. I think a lot of this growth is just a healthy manifestation of how the market has reordered during this disintermediation phase, away from banks as aggregators and short term lenders and sort of capital markets syndication being the connective tissue more to long term lenders and investors acting as aggregators and long term lenders with, you know, a smaller role for banks. So I think this growth and issuance is a healthy thing. I would certainly not say it's anything concerning or bubbly in nature. I think it's really a reflection of the reordering of participants in the markets.
Jay Diamond: We think that it is a more stable market as it's pulled away from the banks and more centered in non-bank lenders and investors.
Karthik Narayanan: I would agree with that, Jay. And I would just point to the fact that before the GFC, just ignoring banks for a minute, you had a lot of levered participants as investors. They're all gone. You look at who are the investors in this growing world and structured credit now. They're real money investors that are not sort of highly levered speculative investors. They're more buy to hold, credit savvy investors in the market. So stronger hands, the market microstructure has really changed to reflect that. And the other way you see that is in trading volume. So if you turn the clock back to the normalization phase, as I call it, you know, 2010, 2012, and you just pick an asset class that's been around for a long time, like CMBS, the percent of CMBS that traded every year relative to the amount of outstanding CMBS—so the turnover—was something like 25 or 30%. Now it's about 10%, which sounds like a big drop. But interestingly enough, if you look at the other structured credit markets, it's CLOs, ABS. They're all around 10% and they've been around that number for a long time. So the market's sort of coming to this new equilibrium. And I think it just reflects a more, buy and hold real money kind of investor base.
Jay Diamond: What benefits are investors looking for in structured credit?
Karthik Narayanan: The way we approach it, we're really looking for, three things. The first is, can we harvest excess yield for a given level of credit risk relative to liquid credit markets? What are the units of risk I'm taking? And then how much we're getting pay for each unit of risk? And what we've found in structured credit and what we look for today as well, is that the units of return on those units of risk are higher than what we get in liquid credit. And we do believe that that's the case, and especially in certain less followed parts of the structured credit market. The second point is structured credit will offer shorter spread durations or shorter maturities. Typically, a large part of the market is going to be centered around a five-year average maturity, plus or minus. And that reduces just mathematically, the potential for marked market volatility for a given level of spreads change. So the potential for volatility is lower because of the lower maturity profile compared to on the run liquid credit in the high grade comparable rated market. I think the third point, which is one of the most important points, is structured credit historically, because of the merits of the structuring and bondholder protections, have experienced lower defaults for a given letter rating than a lot of other asset classes and fixed income. And so the good news about that is, if you do a good job and you're able to continue to provide those lower defaults in a portfolio, then you will actually earn the yield that you are buying at the initial investment. So in fixed income, if you're going to buy a structured finance investment and hold it for three, five, seven years, the yield you buy today is, you know, absent defaults, is going to be the return you earn. So, you know, if you're looking at these on a through a cycle basis, as we do in our process, and you can minimize the amount of credit losses in structured finance—we call that loss-adjusted yield. Your loss adjusted yield will look like your not loss adjusted yield because your losses are low. So you're able to actually monetize that excess yield. So those are really the three the three things we're looking for.
Jay Diamond: We talk a lot about the benefits of structured credit. But there are risks obviously. And you know for people who listen all the way to the end of our podcast, we do have a mellow voiced Englishman reading disclaimers about the risks of asset-backed securities. But if you would, what are just some of the risks that are particular to asset-backed securities that investors should be aware of?
Karthik Narayanan: I would highlight that these are still credit risky instruments. They are not guaranteed by the government or, you know, any other entity. And like corporate bonds or any other credit, risky instruments, there is a potential of loss arising from default or other sort of contractual nonperformance. There's interest rate risk. So many, but not all of the debt instruments in structured finance are fixed rate, some are floating rate. Most notably CLOs are almost exclusively floating rate. But for the fixed rate fixed income asset classes, there is interest rate risk. So as interest rates change, particularly as interest rates rise, there could be capital loss associated with, you know, individual investment. So that's not unusual. It's nothing unique. But just highlighting that as a risk within fixed income investing. Liquidity risk. As the market is evolved, trading has really matured in this market. That doesn't mean the trading volumes have increased. It just means there are more participants. But even with that, there is liquidity risk. When there are big shocks to the market, material changes in the direction of the economy, or geopolitically that is going to affect investors’ appetite for risk, and that is going to flow through to liquidity and ability to trade. So the market has certainly matured, but it is subject to, liquidity risk as many other fixed income sectors. And I think the credit risk part, I think is probably the most important one. And that's really why investors are getting paid more in this asset class, because part of the analysis is to determine, "Am I taking more credit risk or is this just complexity risk." And really we want to get paid for complexity risk as opposed to just outright taking more credit risk.
Jay Diamond: And as you did point out, ABS had a relatively strong track record here in falls and recoveries. Even during the great financial crisis.
Karthik Narayanan: That's right. I think a lot of the bad performance was clearly delineated within residential mortgages, but ABS and CLOs that were around at that time, you know, and weathered that storm are in pretty good shape.
Jay Diamond: Well, thanks for all this background and the history lesson, Karthik. It's very important for folks to understand this context. I want to move into what you're seeing now and what you're thinking about in the marketplace. And we can’t have any market discussion, really, in any sector or without asking about, how you are evaluating the impact of policy machinations that are going on in Washington, in particular, how are you looking at impact of possible outcomes in tariffs and taxes and deregulation or cuts to government spending? How does that work in your analysis of the market dynamics?
Karthik Narayanan: So as everyone that follows the financial news knows that this administration has a very long policy docket of things that they want to get done. And the big question for us as investors is what all of that actually gets done. And what are the knock on effects? And I think largely it's very early to have a sharp view on that. What we can say is it is raising a risk premia across the markets just in the form of volatility and uncertainty. But, you know, I want to be a little bit more specific in terms of structured credit and just how we're thinking about things, acknowledging that it is early days and there's just a lot we simply can't know at this point. Just on tariffs. You know, these are going to have mixed impact across different businesses. And a very, very complex topic as our listeners are aware. But I just want to guide that this sort of does highlight the importance of credit diversity you get in diversified fixed income portfolios, and frankly, even just within the structured credit asset class itself. So just taking a few non-exhaustive examples that we think, if we start with, say, CLOs, where the collateral backing the CLO is a large portfolio of diversified bank loan obligors, borrowers, you know, the bank loan market in general, these are going to be smaller companies and more domestically oriented companies than what you're going to see in the investment grade credit market. Now, there you see the market reacting modestly to some of the more tariff exposed sectors like auto or electrical components, textiles, clothing, etc. and you see some differential performance in dollar prices and loans. But this is not a magnitude that's altering anyone's investment outlook for the overall market or certainly for the CLO market based on what we see today. Now, just moving to other examples within the asset backed world, you think of something like maritime containers. So these are ABS deals that are backed by leases on shipping containers, are used to transport goods across the ocean as well as the containers themselves. So you have contractual cash flows and assets, you know, and you say, well, you know, with tariffs you have a smaller amount of trade units of goods being sent around. Perhaps the prices of those goods may move in a different direction, but the units of goods should decline. But the offset to that is that trade routes may get longer and more logistically complicated and longer transit times. And so the demand for containers may actually be higher because the ecosystem becomes a little more complicated. And you think of something like data centers, which are already supply constrained, and data centers are something that are financed in the ABS market. This is a market with a lot of end demand growth, but it is supply constrained and could become even more supply constrained given that there's certain electrical equipment that may be hung up as a result of tariffs, building materials, etc. So, you know, the impacts can be very differentiated. And I think it highlights the importance of credit diversity. But, you know, that's a very a long winded way of saying that there's a lot we don't know at this point. I think diversity is going to help with that. And it's going to take some time to play out.
Jay Diamond: So, what other aspects of the market are kind of high level concerns for you right now?
Karthik Narayanan: Sure. I would just highlight two things. One is commercial real estate. Our listeners know that the combination of higher financing costs, reduced bank credit availability and changes in demand have really made some big impacts and structural changes on the commercial real estate market. I would say the market is most of the way along of sorting out haves and have nots and really bifurcating between properties that have visible end demand that are financeable versus properties that have questionable end demand and may require a lot of capital in and still may have uncertain prospects. And you see that in the CMBS market issuance ticking up, reflecting that higher confidence. But this market is still undergoing a lot of change and it's going to take some time to fully sort out. The other point I'd make is on the consumer. Headline performance for consumer credit has softened a bit over the last couple of quarters, but is still generally in good shape. But I think that sort of betrays a more important underlying dynamic that is something where we're watching and is informing how we're thinking about investing when it comes to things related to the consumer, whether that's consumer ABS or even residential mortgages. Really what you're seeing is a longer running bifurcation in the market in the U.S. across the lines of income and net worth. So lower income households have experienced more notable credit deterioration, let's say, over the 2023 to present time frame, as the effects of higher costs on consumer goods as well as shelter in the form of rents and drawing down of Covid era stimulus, is showing up in the performance of unsecured consumer loans, auto loans, and even FHA guaranteed mortgages, so Ginnie Maes. Now in contrast to that, if you look at higher earners, these tend to be homeowners, they have significant wealth effect gains from, you know, you think of the stock market basically doubling in the last five years and real estate up 50 percent over that same time period, and are in a much different financial position. The stats on this are quite astonishing. I mean, if you look at the, you know, just the top half of the income distribution in the U.S., their homeownership rate is almost 80 percent, I think 77 percent. And then if you look at renters versus homeowners, renters have an average credit score of 640, while homeowners have an average credit score of 755. That's a pretty large bifurcation, and it certainly has impacts on how we think about where we want to invest when it comes to consumer related things, but I think those are the ones I would highlight commercial real estate, the consumer, the importance of credit diversity in a time of policy and fiscal uncertainty.
Jay Diamond: So let's move into the areas of structured credit which you are moving into. And what do you think are most attractive right now?
Karthik Narayanan: I think there's a couple areas that we're, finding the most attractive right now. The first is in some of the nontraditional parts of the ABS market, so a lot of this we call commercial ABS or esoteric ABS aircraft ABS looks pretty interesting right now. A lot of the digital infrastructure ABS looks pretty interesting. Selected areas of the consumer market. I mentioned before, this is bifurcation theme, but if we focus on borrowers, they're looking for, you know, maybe convenience products like, you know, home equity lines of credit or closed end seconds or, you know, home improvement loans. And, you know, these are borrowers that are generally in these cases, they're all homeowners, but there's a stronger underlying credit profile to underpin some of these products. Those are all interesting. And then just within the commercial ABS world, these are single A or triple B. In some cases, they're all investment grade senior tranches that are yielding something like 100 to 150 basis points above what you get in similarly rated, corporate bonds. So these are bonds that are trading, you know, between 5.5 to 7 percent, depending on the specifics, but pretty interesting, profiles there. Away from ABS, residential mortgages are another area that we have pretty good conviction in. These are the non-government guaranteed part of the market. So there's some nontraditional products like second liens, residential transitional loans, non-qualified mortgages.And really there's sort of a common theme underlying all of these, which is all these products are building on ten plus years of very conservative underwriting and a lot of home price appreciation that's locked into the market. So just to contextualize that last point, if we look at, you know, the total U.S. amount of mortgage debt, it's about $13 trillion. And that's, you know, a little bit higher than where it was right on the eve of the of the GFC, which is 18 years ago. So the amount of debt is a little higher than what it was then, despite the population growth, etc. Now, in contrast, the homeowners equity, which is about $35 trillion, is almost three times what it was at that same point in time. So the leverage profile, the risk profile is just completely different than what it's looked like in the past. So I think a lot of that underpins our interest in mortgages. And we think that's interesting as well. Moving to CLOs, here we're taking a bit of a conservative approach. We favor the senior part of the CLO capital structure. So that's really Triple A's in single A-rated tranches from CLO deals backed by both broadly syndicated bank loans as well as private credit or middle market loans. We are taking a little bit of a barbell approach, just part of the reason we're not buying triple B and double B CLOs right now is those spreads have, you know, they are sort of orbiting the tighter end of the range. And the consequence of those credit spreads being low is that the returns on CLO equity are still pretty attractive at this point, even though bank loan prices are somewhat high in their historical sense and CLO spreads are somewhat low in a historical sense. So there's a bit of a barbell that could be interesting for certain strategies that have a higher risk tolerance. But for our traditional fixed income credit strategies, we are really emphasizing the top of the capital structure, the triple A to single A rated CLOs. And I think those are really the key areas we're focusing on right now. And there are some selected opportunities that come up in the commercial mortgage space. And those are very property specific, there. But, you know, we are trading light in that part of the market.
Jay Diamond: It's fair to say that the portfolios that we manage look a little bit different from those that are managed by other asset managers because we tend to be overweight structured credit in all of its forms. Is that a fair characterization?
Karthik Narayanan: It is. And, you know, I'll say two things about that. Part of it is there's going to be the risk reward calculus that we are doing and our competitors doing, and we have different opinions about what that should look like. But the other part of it that I think is maybe not as easy for people to appreciate is structured credit, even if we're talking about the ABS market, which is the, you know, the broker dealer traded more standardized end of the market and not the, you know, loan form, asset-based lending into the market. It is not an easy task for an investor to show up one day and just build an entire prudently diversified portfolio with, you know, a long list of their best ideas. It takes a long time to access this market. And, you know, certainly, I like to think we do a good job at it. And that's not to say that we won't have a esteemed competitors that also do a good job at it. But, we've certainly been doing this a long time, and we appreciate the fact that, you know, there's a cumulative benefit to having been in this market for a while. And it's different than saying, you know, that we have all the answers. So we certainly strive every day to get smarter what we do and deliver. But it's really accessing these investments and getting the right risks on the books at the right price, which ultimately is what's going to generate performance both in terms of returns and suppressing volatility. It is something that takes a long time. And so I think managers that may come at this more from a top down sector rotation standpoint, whereas we tend to balance that with the bottom up, they may have a hard time ramping up into structured credit when they want to, as opposed to having many investments built into a portfolio over time that will grind out incremental performance slowly and steadily. So I just want to leave you with that point too, Jay, because I think the portfolio construction aspect of it is an important one in terms of how investors implement these strategies. And it's also explains why a lot of, you know, funds you'll see out there that are called structured finance tend to be heavily weighted towards agency mortgages, because frankly, it's just an easier market to access and so the labels may not always reflect what's actually under the hood.
Jay Diamond: Thanks again for your time, Karthick. It's been great to chat with you, but before I let you go, are there any final takeaways that you want to leave with our listeners?
Karthik Narayanan: Sure. Jay, what I would say is it's a pretty interesting time in the market right now, and I'm glad we've had the time today to get under the hood a little bit of how we do what we do and how we got here and some of the interesting areas. But zooming out, if you're an investor that's looking at this for the first time or just keeping tabs on the market, we're in a world where static yields on investment grade structured credit is between 5.5 to 7 percent, and so that's a pretty attractive range, I think, on a historical basis relative to the risks that we talked about here. So I think that's a pretty interesting time in the market to be talking about this. So appreciate the chance to come on again and to talk about the world of structured finance.
Jay Diamond: Terrific. Thanks again for your time. Karthik. I hope you will come back and visit again 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. And if you have any questions for Karthik 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. We look forward to gathering again for the next episode of Macro Markets with Guggenheim Investments. In the meantime, for more of our thought leadership, visit GuggenheimInvestments.com/perspectives. So long.
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Structured credit, including asset-backed securities (ABS), mortgage-backed securities, and CLOs, are complex investments and not suitable for all investors. Investing in fixed-income instruments is subject to the possibility that interest rates could rise, causing their values to decline. Investors in structured credit generally receive payments that are part interest and 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 they are subject to liquidity and valuation risk. CLOs 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.
Read a fund’s prospectus and summary prospectus (if available) carefully before investing. It contains the fund’s investment objectives, risks, charges, expenses and other information, which should be considered carefully before investing. Obtain a prospectus and summary prospectus (if available) at GuggenheimInvestments.com or call 800.820.0888.
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 and 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.
Investors in asset-backed securities ("ABS"), including mortgage-backed securities ("MBS"), and collateralized loan obligations (“CLOs”), generally receive payments that are part interest and part return of principal. These payments may vary based on the rate loans are repaid. Some asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. CLOs bear similar risks to investing in loans directly, such as credit, interest rate, counterparty, prepayment, liquidity, and valuation risks. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.
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