Global bond markets have become the centre of investor attention as central banks hike key interest rates. Guggenheim Investments says that as the US Federal Reserve nears the end of its hiking cycle, fixed income investments present an opportunity due to the disproportionate recovery of the market.

“We remain positioned to benefit from tighter spreads and a normalizing of credit curve relationships but are mindful of the risk of a reversal of the recent strength and a longer term weakening of credit fundamentals. Both risks call for active sector allocation, overweighting higher quality credit, disciplined security selection, and maintaining sufficient dry powder to allow for future flexibility,” Guggenheim says in its whitepaper discussing fixed income views.

The investment manager believes that a recession in 2023 will not be overly severe, but cannot be avoided altogether, even as macroeconomic conditions in Europe and China improve.

“As a new trading year begins, investors in U.S. Treasury and Agency markets stand to benefit from the potential recovery of one the worst yearly return periods of the last 50 years. This opportunity for positive total return comes on the heels of a year shaped by the Fed’s fight to tackle inflation that was more persistent than most market participants expected,” as per Guggenheim.

Meanwhile, the asset manager expects technical tailwinds for investment-grade corporate spreads to continue in the first quarter of 2023, whereas high-yield corporate bonds were resilient amid fed tightening during the past year.

“While the negative rating migration trend is likely to continue, we see opportunity in select sectors and issuers that offer some element of safety. We favour issuers with contracted revenue streams, senior secured first lien positions with modest leverage, players with strong market share, and issuers with adequate liquidity over the next 12 months,” adds Guggenheim.

Apart from the mainstream fixed income assets, the investment management firm further talks about muni bonds, asset-backed securities, mortgage-backed securities, and others.