**Fixed Income Insights: Navigating the Bond Market**
As of June 30, 2024, the Institutional Class of our fixed income fund delivered a 1-year return of 3.60%, outperforming its benchmark, the Bloomberg U.S. Aggregate Bond Index, by 0.28%. The fund’s relative outperformance was driven by security selection, sector allocation, and its carry advantage over the benchmark.
In the second quarter, the fund benefited from an overweight allocation to non-agency residential mortgage-backed securities (RMBS) and asset-backed securities (ABS), as structured credit outperformed corporate credit. Investment-grade corporates and agency RMBS were key contributors to relative performance due to security selection and underweight allocations to the benchmark.
The fund maintained a relatively neutral overall risk positioning, focusing on capital preservation while selectively capitalizing on opportunities across various higher-quality credit segments. Positioning favors higher-quality sectors, including an overweight to senior tranches within securitized credit. The fund also maintained a slight duration overweight versus the benchmark, focused on the front to intermediate part of the curve.
Our economic outlook has improved over the past year, with the aggregate economy showing resilience to rate hikes. However, we view risks to this forecast as tilted to the downside, particularly relative to market expectations. Credit selection remains important given the balance of risks in our economic outlook.
The fund’s performance was also driven by its allocation to Treasurys, which remains higher than usual, though still underweight the benchmark, to maintain dry powder to deploy should credit segments cheapen. Agency mortgage-backed securities exposure increased 10% during the quarter, with a focus on near-production coupons possessing the highest carry profile and widest nominal spreads due to heightened interest rate volatility.
In the current market environment, all-in yields remain attractive relative to the last decade, although most of the compensation is coming from benchmark yields rather than spreads. The summer seasonal slowdown in investment-grade corporate bond issuance was more pronounced than expected, while high-yield corporate bond yields and spreads fluctuated in a tight range.
The bank loan market continues to be supported by strong demand via collateralized loan obligations (CLOs) issuance and a lack of new money transactions. ABS spreads were flat, with steady supply and strong investor demand, and broadly syndicated CLO spreads ground tighter.
As the Fed remains attentive to downside risks, any substantial shift in conditions could be met with expectations of greater monetary policy easing, creating an opportunistic environment for active fixed-income investors.
**Risk Considerations**
Investors should be aware that the fund may not be suitable for all investors. The value of a fixed-income security falls when interest rates rise and rises when interest rates fall. Longer-term bonds are more sensitive to interest rate changes and subject to greater volatility than those with shorter maturities. Additionally, investments in asset-backed securities, including CLOs, involve special types of risks, including credit, interest rate, counterparty, prepayment, liquidity, and valuation risks.
Please read the prospectus for more detailed information regarding these and other risks. Index definitions and additional information can be found at GuggenheimInvestments.com.
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