February 13, 2013 | By Scott Minerd
Virtually every recent data release indicates that the United States is in a sustained economic expansion. From the positive underlying strength in fourth quarter 2012 GDP, to stronger housing, falling unemployment, and increasing state and local tax receipts, there is hardly a gray cloud in the sky. Importantly, however, there is a sea change underway in the markets. We are transitioning from the environment of the last five years in which the market digested and reacted to macroeconomic results to one that will be increasingly dominated by politics and political risk. Given the range and scope of programs being pursued by policymakers around the world, investors will have to focus more on the agendas of nations and their central banks. Europe’s ongoing structural issues and the looming fiscal uncertainty in the U.S. are unsettling, however, the most overt manifestation of the shift that’s underway is the threat of global currency wars. Tuesday’s comments by the G7 on the adverse economic and financial implications of competitive devaluation, combined with the United States’ comments that Japan is likely pursuing the right policy by seeking to combat deflation, highlight the contradictory nature of the geo-political climate. All the while, Japan’s aggressive monetary accommodation is becoming more worrying for leaders in the European Union, who are concerned about the consequences of the euro’s rapid increase in value. The net effect of all this opportunistic policy activity and disagreement will likely be heightened volatility as we head further into the year.
The Bank of Japan’s (BoJ) effort to reflate the Japanese economy has elevated the bond market’s inflation expectations. Japanese swap rates, which gauge market expectations on future interest rates, have moved dramatically over the past few months in response to the BoJ’s policies. Most noticeably, the spread between the 30-year swap rate and the 10-year swap rate has widened from 88 basis points in September 2012 to 120 basis points in January 2013, reaching the highest level since data began in 1999. The widening spread suggests that investors are expecting a rising inflation rate in the future and are liquidating their holdings of long-term securities to reduce their duration risk.
Source: Bloomberg, Guggenheim Investments. Data as of 1/31/2013.
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.
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