U.S. Treasurys are a ‘Ponzi market’: Guggenheim’s Minerd

In a note released on Wednesday, Scott Minerd, global chief investment officer at Guggenheim Partners, said that the central bank has effectively turned the U.S. Treasury market into a "Ponzi Scheme." A Ponzi Scheme involves the fraudulent act of repaying one investor's money with the principle of another, thereby over-inflating the value of assets until the bubble finally pops.

Ben Eisen
June 13, 2013, 8:42 AM
Market Watch

There’s no shortage of descriptions out there for central-bank policies — past favorites have included allusions to mad scientists and heroin treatment programs.

But Scott Minerd, global chief investment officer at Guggenheim Partners, may take the prize for the most gutsy portrayal of monetary-easing policies. In a note released on Wednesday afternoon, Minerd says the central bank has effectively turned the U.S. Treasurys market into a “Ponzi market’.

A Ponzi scheme involves the fraudulent act of repaying one investor’s money with the principal of another, thereby over-inflating the value of assets until the bubble finally pops. (If you need a refresher, we suggest you check out MarketWatch’s recent interview with infamous Ponzi schemer Bernie Madoff.)

The crux of Minerd’s argument is that the Federal Reserve’s bond-purchase program, known as quantitative easing, has introduced false confidence into the market because investors believe Treasury investments will continue to increase in price. Just like a Ponzi scheme, the value of Treasury assets has become disconnected from its underlying value. Here’s what he wrote:

“The U.S. Treasurys 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.”

One indication of the distortion is a comparison between the real, or inflation-adjusted, 10-year Treasury note 10_YEAR -2.55% yield and the University of Michigan’s consumer confidence index. The two have historically moved in tandem, but that relationship broke down at the end of 2011.

“The yield on 10-year Treasurys would be roughly 150 basis points higher than it is today if the market was not being distorted by Ponzi (uneconomic) buying,” Minerd wrote. The 10-year note yielded 2.199% Thursday morning.

This isn’t the first time Minerd has sounded the “Ponzi” alarm. Just over a year ago, he wrote in a note that ”the market has reached levels that wouldn’t be sustainable if free market forces were allowed to prevail.”

In his 2012 note, he suggested shorting Treasurys. He didn’t make that call in his Wednesday note, only suggesting that the tumultuous state of the markets is likely to continue.

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