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First Quarter 2017

Fixed-Income Outlook: Chart Highlights Assessing Value in a Faith-Based Rallyfor 2016 10 Macroeconomic Forecasts Guggenheim Investments


Table of Contents The Guggenheim Investments (“Guggenheim”) quarterly Fixed-Income Outlook presents the relative-value conclusions of our 160+ member fixed-income investment team and illuminates the uniqueness of our investment process. This chart book presents selected highlights from the First Quarter 2017 Fixed-Income Outlook. Surge in Consumer and Business Confidence Will Support GDP Growth

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Another Year of Record Issuance for Investment-Grade Corporate Bonds

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Market Absorbs Some of the Rate Backup

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High-Yield Spreads Over Investment Grade Have Scope to Narrow

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All Non-Agency RMBS Spreads Compressed in 2016

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Real Estate in Long Post-Crisis Recovery

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Mortgage Refinancing: An “Out of the Money” Option for Most Borrowers

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Market Repricing of the Fed Path Will Cause Yield Curve to Flatten

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Guggenheim’s Investment Process

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This material is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This material should not be considered research nor is the material intended to provide a sufficient basis on which to make an investment decision. This material contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy.

Guggenheim Partners

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Surge in Consumer and Business Confidence Will Support GDP Growth Consumer Confidence

 We expect corporate and individual tax cuts plus infrastructure spending to lift growth 2.5–3.0 percent over the next two years, with the largest impact likely to be seen in 2018.

Small-Business Optimism

Z-Score (Standard Deviations from the Mean)

3

2

1

 In the meantime, growth should benefit from recent gains in consumer and business confidence, which will support consumption and investment spending.

0

-1

 Strong growth, plus continued improvement in the labor market, will likely cause Fed policymakers to raise rates at a faster pace than the market is currently pricing in.

-2

-3

-4 1975

1980

1985

1990

1995

2000

2005

2010

2015

 We expect the Fed to raise the fed funds rate three times in 2017.

Source: Guggenheim Investments, Haver Analytics, Conference Board, NFIB. Data as of 1.31.2017. Shaded areas represent periods of recession.

Guggenheim Partners

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Another Year of Record Issuance for Investment-Grade Corporate Bonds Gross Issuance

 Optimism overtook the investment-grade corporate bond market in 2016. Demand for yield facilitated $1.2 trillion of capital raising by U.S. investment-grade corporate bond issuers ($652 billion on a net basis), surpassing 2015’s record by almost $15 billion.

Net Issuance

$1,400 Bn

$1,200 Bn

$1,000 Bn

$800 Bn

 By year end, spreads in the energy sector had retraced to their tightest level since November 2014, when West Texas Intermediate spot oil prices averaged $77 per barrel.

$600 Bn

$400 Bn

$200 Bn

$0 Bn 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

 A positive 2017 earnings outlook fueled the rally more broadly, with average index spreads ending the year at their tightest level since March 2015 as the market priced in anticipated progrowth policy changes.

Source: JP Morgan, Guggenheim Investments. Data as of 12.31.2016.

Guggenheim Partners

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Market Absorbs Some of the Rate Backup Yield to Worst (LHS)

10-Year Treasury Yield (LHS)

Investment-Grade Spreads (RHS)

4.0%

250 bps

3.5%

225 bps

3.0%

200 bps

2.5%

175 bps

2.0%

150 bps

1.5%

125 bps

1.0% Jan-15

Apr-15

Jul-15

Oct-15

Jan-16

Apr-16

Jul-16

Oct-16

100 bps Jan-17

 Treasury yields have risen by 104 basis points since bottoming at 1.36 percent to reach 2.40 percent as of Jan. 23.  Investment-grade corporate bond yields have followed Treasury yields higher, but to a lesser extent, demonstrating their capacity to absorb some of the backup in rates.  Investment-grade bond yields bottomed out at 2.75 percent in July 2016, and were trading at 3.30 percent as of Jan. 23, an increase of 55 basis points.  Spreads appear tight, but yields are more attractive today than they were in the middle of 2016.

Source: Bloomberg Barclays Indices, Guggenheim Investments. Data as of 1.23.2017. Note: Yield to Worst is for the Bloomberg Barclays Corporate Investment Grade index.

Guggenheim Partners

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High-Yield Spreads Over Investment Grade Have Scope to Narrow

Z-Score (Standard Deviations from the Mean)

High-Yield Spreads (LHS)

Moody’s Default Rate Projection 12-Months Forward (RHS)

2000

20%

1800

18%

1600

16%

1400

14%

1200

12%

1000

10%

800

8%

600

6%

400

4%

200

2%

0 2003

0%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016 2017

 High-yield bond spreads tightened meaningfully in the second half of 2016 on the back of an improving corporate earnings outlook and declining high-yield default rate projections, retracing nearly all of the widening that has taken place since the beginning of the oil bear market in July 2014.  High-yield bond spreads ended 2016 at only 472 basis points, which is historically consistent with a default rate projection between 2 and 4 percent.  Overall, the market appears to be priced for the fundamental recovery that we expect to see in earnings data, interest coverage, and leverage multiples by yearend 2017.  Although spreads appear to be rich, we expect to see tighter levels this year.

Source: Moody’s, Credit Suisse, Bloomberg, Guggenheim Investments. Data as of 12.31.2016.

Guggenheim Partners

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All Non-Agency RMBS Spreads Compressed in 2016 Current Spread

 Non-Agency RMBS investors shrugged off the incrementally negative effects of higher interest rates on home price appreciation and mortgage prepayments and discounted the potential for pro-growth fiscal policies to extend the current economic expansion.

52-Week Range

700

CRT Non-Investment Grade

600

Spread (bps)

500 Option ARM SSNR 400

Prime Alt-A NonInvestment Grade

Subprime NonInvestment Grade

 Spreads in many subsectors are now near post-2008 tights. Tight spreads necessitate a cautious outlook, but opportunities exist to benefit from improving credit fundamentals.

Subprime Investment Grade

300

CRT NonInvestment Grade

200

100

0 0

2

4

6

8

Weighted Average Life (Year)

10

 In today’s low-spread environment, our focus remains on upgrading to shorter maturity and more senior tranches for small spread concessions.

Source: Wells Fargo, Guggenheim Investments. Data as of 12.31.2016. Note: CRT=credit risk transfer securities; SSNR=super-senior tranche; ARM=adjustable-rate mortgage.

Guggenheim Partners

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Real Estate in Long Post-Crisis Recovery

Z-Score (Standard Deviations from the Mean)

300

Office – Central Business District Apartment

250

National All-Property Office

200

Industrial Non-Major Markets (All Property) 150

Properties in non-major markets are up only 8.4 percent, indicating that not all markets have participated equally in the recovery.

100

50 Dec-00

Dec-02

Dec-04

Dec-06

Dec-08

Dec-10

Dec-12

Dec-14

Dec-16

 The real estate market has now seen seven years of increasing values since the 2009–2010 lows. Overall values are 22.3 percent higher than at their prerecession peak.  Apartments lead by a wide margin, 50 percent higher than pre-recession levels. Central business district office properties are up 45 percent.  The flow of foreign funds into U.S. real estate will likely continue to support the upward trend. A recent survey by the Association of Foreign Investors in Real Estate indicates that 95 percent of its members plan to maintain or increase their investment in U.S. real estate in 2017.

Source: Real Capital Analytics, Moody’s, Guggenheim Investments. Data as of 11.30.2016.

Guggenheim Partners

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Mortgage Refinancing: An “Out of the Money” Option for Most Borrowers 2008

 With the decline in rates since the financial crisis, the “coupon stack” of the mortgage market reflects the refinancing activity that has taken place. In 2008, 87 percent of MBS had a 5–6 percent coupon. Today, 81 percent has a 3–4 percent coupon.

2016

40%

Percent of MBS outstanding

35% 30% 25%

 The post-election rise in market rates has substantially decreased the primary risk of Agency MBS: cash flow uncertainty due to voluntary prepayments. After years of declining rates, the majority of borrowers have taken advantage of lower rates by refinancing.

20% 15% 10% 5% 0% 2.50

3.00

3.50

4.00

4.50 5.00 5.50 MBS Coupon %

6.00

6.50

7.00

7.50

 The market’s post-crisis refinancing exposure has decreased dramatically. Investors have reacted to the altered market structure by holding pricing spreads at the low end of the post-crisis range.

Source: Wells Fargo, Guggenheim Investments. Data as of 12.31.2016.

Guggenheim Partners

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Market Repricing of the Fed Path Will Cause Yield Curve to Flatten FOMC Central Tendency Range

FOMC Median

 In December the median FOMC participant projected three rate hikes in 2017. The median forecast also sees three hikes in 2018 and 2019.

OIS Forward Curve

3.5%

3.0%

Fed dots are likely to rise further once fiscal easing materializes.

 The market is skeptical that this pace of hikes will materialize, with forward overnight index swap (OIS) rates still well below the Fed’s projections.

2.5%

2.0%

 We expect the Fed to deliver on their three rate hikes in 2017, which should jolt rates higher in the front end and flatten the yield curve.

1.5%

1.0%

0.5% Dec-16

Dec-17

Dec-18

Dec-19

Longer Run

 A barbell portfolio strategy is appropriate for a flattening yield curve: Short-duration floating-rate assets will benefit from rising rates while the long end will be supported as the Fed demonstrates its willingness to contain inflation.

Source: Guggenheim Investments, Federal Reserve Board, Bloomberg. From the December 2016 Summary of Economic Projections. OIS data as of 1.17.2017. Note: OIS forward rates reflect market expectations for the effective federal funds rate in the future. Central tendency is the range of FOMC participant projections excluding the three highest and three lowest. The FOMC defines “longer run” as five to six years into the future.

Guggenheim Partners

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Guggenheim’s Investment Process

Designed to be disciplined, systematic, and repeatable, our fixedincome investment process is disaggregated into four specialized teams: Macroeconomic Research, Sector Teams, Portfolio Construction, and Portfolio Management. This process does not rely on one key individual or group, and is structured to avoid

cognitive biases, snap judgments, and other decision-making pitfalls identified by studies on behavioral finance. Our pursuit of compelling risk-adjusted return opportunities typically results in asset allocations that differ significantly from broadly followed benchmarks.

Guggenheim Partners

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Important Notices and Disclosures This material is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This material should not be considered research nor is the article intended to provide a sufficient basis on which to make an investment decision. This material contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy.

risk. Asset-backed securities are particularly subject to interest rate, credit and liquidity and valuation risks. The municipal bond market may be impacted by unfavorable legislative or political developments and adverse changes in the financial conditions of state and municipal issuers or the federal government in case it provides financial support to the municipality. Income from the municipal bonds held could be declared taxable because of changes in tax laws. Certain sectors of the municipal bond market have special risks that can affect them more significantly than the market as a whole. Because many municipal instruments are issued to finance similar projects, conditions in these industries can significantly affect an investment. Municipalities currently experience budget shortfalls, which could cause them to default on their debts.

Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy or, nor liability for, decisions based on such information.

Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Real Estate, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management. This material is intended to inform you of services available through Guggenheim Investments’ affiliate businesses.

RISK CONSIDERATIONS Investing involves risk, including the possible loss of principal. Fixed income investments are subject to credit, liquidity, interest rate and, depending on the instrument, counter party risk. These risks may be increased to the extent fixed income investments are concentrated in any one issuer, industry, region or country. The market value of fixed income investments generally will fluctuate with, among other things, the financial condition of the obligors on the underlying debt obligations or, with respect to synthetic securities, of the obligors on or issuers of the reference obligations, general economic conditions, the condition of certain financial markets, political events, developments or trends in any particular industry and changes in prevailing interest rates. Investing in bank loans involves particular risks. Bank loans may become nonperforming or impaired for a variety of reasons. Nonperforming or impaired loans may require substantial workout negotiations or restructuring that may entail, among other things, a substantial reduction in the interest rate and/or a substantial write down of the principal of the loan. In addition, certain bank loans are highly customized and, thus, may not be purchased or sold as easily as publicly traded securities. Any secondary trading market also may be limited and there can be no assurance that an adequate degree of liquidity will be maintained. The transferability of certain bank loans may be restricted. Risks associated with bank loans include the fact that prepayments may generally occur at any time without premium or penalty. High yield debt securities have greater credit and liquidity risk than investment grade obligations. High yield debt securities are generally unsecured and may be subordinated to certain other obligations of the issuer thereof. The lower rating of high yield debt securities and below investment grade loans reflects a greater possibility that adverse changes in the financial condition of an issuer or in general economic conditions or both may impair the ability of the issuer thereof to make payments of principal or interest. Securities rated below investment grade are commonly referred to as “junk bonds.” Risks of high yield debt securities may include (among others): (i) limited liquidity and secondary market support, (ii) substantial market place volatility resulting from changes in prevailing interest rates, (iii) the possibility that earnings of the high yield debt security issuer may be insufficient to meet its debt service, and (iv) the declining creditworthiness and potential for insolvency of the issuer of such high yield debt securities during periods of rising interest rates and/ or economic downturn. An economic downturn or an increase in interest rates could severely disrupt the market for high yield debt securities and adversely affect the value of outstanding high yield debt securities and the ability of the issuers thereof to repay principal and interest. Issuers of high yield debt securities may be highly leveraged and may not have available to them more traditional methods of financing. Asset-backed securities, including mortgage-backed securities, may be subject to many of the same risks that are applicable to investments in securities generally, including currency risk, geographic emphasis risk, high yield and unrated securities risk, leverage risk, prepayment risk and regulatory

1 Guggenheim Investments total asset figure is as of 12.31.2016. The assets include leverage of $12.3bn for assets under management and $0.4bn for assets for which we provide administrative services. Guggenheim Investments represents the following affiliated investment management businesses: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Real Estate, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management. 2 Guggenheim Partners’ assets under management are as of 12.31.2016 and include consulting services for clients whose assets are valued at approximately $63bn. ©2017, Guggenheim Partners, LLC. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.

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About Guggenheim Investments Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with $209 billion1 in total assets across fixed income, equity, and alternative strategies. We focus on the return and risk needs of insurance companies, corporate and public pension funds, sovereign wealth funds, endowments and foundations, consultants, wealth managers, and high-net-worth investors. Our 275+ investment professionals perform rigorous research to understand market trends and identify undervalued opportunities in areas that are often complex and underfollowed. This approach to investment management has enabled us to deliver innovative strategies providing diversification opportunities and attractive long-term results.

About Guggenheim Partners Guggenheim Partners is a global investment and advisory firm with more than $260 billion2 in assets under management. Across our three primary businesses of investment management, investment banking, and insurance services, we have a track record of delivering results through innovative solutions. With more than 2,300 professionals based in more than 25 offices in six countries around the world, our commitment is to advance the strategic interests of our clients and to deliver long-term results with excellence and integrity. We invite you to learn more about our expertise and values by visiting GuggenheimPartners.com and following us on Twitter at twitter.com/guggenheimptnrs.

Guggenheim Partners

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Fixed-Income Outlook Chart Highlights: Q1 2017