June 12, 2013 | By Scott Minerd
Economic stability, according to post-Keynesian economist Hyman Minsky, encourages more risk taking and higher leverage -- ultimately causing speculative bubbles and painful recessions. Government intervention designed to stabilize or stimulate the economy, such as quantitative easing (QE), is destabilizing when it gives markets a false sense of confidence. When false confidence is high, Minsky noted, markets become dominated by Ponzi buying -- when investors ignore fundamental asset values and nevertheless borrow to buy, based purely on the belief they can sell assets for more tomorrow than they paid today.
The U.S. Treasuries market could now be described as a Ponzi market. The only reason investors would buy Treasuries today is that they expect the Federal Reserve will buy them at higher prices in the future. This reasoning will come unstuck, however, once the Fed curtails its asset purchase program. We do not know when the Fed will taper QE, but the longer its expansionary policy continues, the more volatility-inducing pressure will build. That means stock and bond markets appear to be in for a rough ride over the next six months or so.
Historically, the real yield on 10-year Treasuries has closely tracked the University of Michigan Consumer Sentiment Index. The correlation broke down, however, in 4Q2011, as a result of the Federal Reserve’s asset purchase program. The yield on 10-year Treasuries would be roughly 150 basis points higher than it is today if the market was not being distorted by Ponzi (uneconomic) buying.
UNIVERSITY OF MICHIGAN CONSUMER CONFIDENCE VS. REAL 10-YEAR TREASURY YIELD*
Source: Bloomberg, Haver Analytics, Guggenheim Investments. Data as of 5/31/2013. *Note: Real 10-year yield calculated by using nominal 10-year yield and core PCE inflation.
This article 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 article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s 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. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2015, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.
Good risk management leads to good decision making.
Why active has the potential to outperform passive in fixed income.
Lower-quality credit spreads have more potential to widen than tighten.
Portfolio Manager Adam Bloch and Matt Bush, a Director in the Macroeconomic and Investment Research Group, share insights from the third quarter 2019 Fixed-Income Outlook.
Anne Walsh, Chief Investment Officer for Fixed Income, shares insights on the fixed-income market and explains the Guggenheim approach to solving the Core Conundrum.
You are now leaving this website.Guggenheim assumes no responsibility of the content or its accuracy.
Your browser does not support iframes.
2019 Guggenheim Partners, LLC. All rights reserved. Guggenheim, Guggenheim Partners and Innovative Solutions. Enduring Values. are registered trademarks of Guggenheim Capital, LLC.