Thu. Sep 28th, 2023
Guggenheim CIO says credit market is 'next shoe to drop'

(Bloomberg) — As calls for a soft landing on Wall Street pile up, Ann Walsh remains on the defensive.

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The chief investment officer of Guggenheim Partners Investment Management, which manages more than $225 billion, is holed up in high-quality bonds as it prepares for lower-quality parts of the credit market to take a hit.

“I don’t think the market is really pricing in the next shoe to drop, and that’s a credit,” she said on Bloomberg TV. “It seems like the recession has lost everyone’s mind, but I think that’s probably a mistake at this point in time.”

Walsh sees lower-quality borrowers at risk with the potential for higher Fed rates for longer and higher rates of downgrades, defaults and bankruptcies.

Quality credit is not a concern. She explained that yields above 5.5% on investment-grade bonds are “attractive,” and the widening of spreads that occur in recessions is unlikely to have a significant impact on that space.

“For those borrowers and credit collectors who have cash and have enough money to pay off right now, they will come through the cycle nicely,” she said.

“The problem is poor credit, and those that don’t have a lot of cash are sitting on the sidelines,” Walsh said. “They are unable to offset these higher costs of capital by reinvesting in monetary instruments.”

Walsh also likes US government bonds, as yields have remained in a relatively stable trading range and offer investors the opportunity to wait on the sidelines, investing in future lower-rated credit if spreads become more attractive.

“I think it’s a really good time to be defensive and thoughtful and wait for the next opportunity,” said the CIO.

Walsh expects the US recession to be “rolling,” with different parts of the economy taking a hit and other, stronger capitalist parts being spared. It also highlighted that the market has yet to react to the commercial real estate cycle, with the cost of leverage still high for borrowers and some renters vulnerable.

“If you’re a small developer who owns a few small office buildings in a suburban area, and you’re now paying 6% of your debt, and all of a sudden your tenants start moving out, you’re in,” Walsh said in a separate interview.

It will closely assess the health of consumer spending over the next several months to determine how much policy tightening works its way through the economy.

She also said that while Thursday’s CPI reading means the Federal Reserve is done raising interest rates, the central bank is still tightening by shrinking its balance sheet.

“I think we’re done with the highs at the moment, but there’s still QT going on,” Walsh said. “Don’t ignore it.”

– With the help of Alix Steel.

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