THE CORE CONUNDRUM - Guggenheim Partners

alance totaled $4.5 trillion in 2007. By the end
of 2012, it had skyrocketed to $11.3 trillion. Yet,
it is projected to go even higher – hitting $18.9
trillion by 2022, according to estimates from the
Congressional Budget Office. As Treasuries climbed
from 19 percent of the core fixed-income universe
to 35 percent over the last five years, the marketcapitalization
weighted Agg has followed suit.
Treasuries currently comprise 37 percent of the
Agg, and combined with agency debt, total U.S.
government-related debt comprises nearly 75
percent of the Index with a weighted-average yield
of 1.6 percent, as of January 31, 2013.
Anchored to a benchmark heavily allocated to
sectors yielding negative real rates of return
has forced investors to reassess the traditional,
benchmark-driven approach to core fixed-income
management. While historically, core strategies
have had negligible exposure to leveraged credit,
emerging-market debt, and non-agency structured
credit – all of which are typically higher yielding
and commensurately, higher risk segments of the
fixed-income universe – this aversion to riskier
assets appears to be waning given the need for
yield. In the next section, we will analyze the
strategies being employed to generate yield, as
investors adjust to new market realities.
Scarcity of Yield across Fixed-Income Landscape
Historically Low Yields across Traditional Core Sectors
18%
15%
12%
9%
6%
7.3%
5.0%
5.5% 5.5%
8.0% 7.9%
6.6%
4.5%
3%
1.9%
1.0%
3.3%
1.8%
2.8%
0.9%
2.5%
1.1%
0%
Sector
Weight
Barclays Agg
100.0%
ABS
0.4%
Municipals
1.4%
CMBS
1.8%
Corporates
21.6%
Treasuries
36.6%
Agency MBS
29.4%
Agency Bonds
8.9%
Historical High
Historical Low
Current
Historical Average
With the average yield of the Barclays Agg at 1.9 percent, and 75 percent of the Index allocated to
Treasuries, agency MBS, and agency bonds, investors with minimum yield targets have nowhere
to hide within the Index and benchmark-driven strategies may continue to fall short of the yield
requirements for most institutional investors. Source: Barclays. Data as of 01/31/2013.
6 | THE CORE CONUNDRUM GUGGENHEIM PARTNERS