Global CIO Commentary by Scott Minerd
This week, 10-year U.S. Treasury yields broke out of their recent trading range to drop below 2.5 percent, their lowest level since October of last year. I believe, for a number of reasons, that yields could trade significantly lower, perhaps dipping as low as the 2.0 to 2.25 percent range in the coming months.
U.S. 10-year Treasury yields appear to have broken out of range and could be headed to the 2-2.25% range.
Over the past few weeks I have written about the role capital flows from overseas have played in keeping U.S. interest rates low. Tensions in Ukraine and China’s devaluation of the renminbi have caused a flight to safety, which has put downward pressure on U.S. Treasury yields. The reality is, however, that these events alone do not explain the declining trajectory of interest rates.
Structurally there is very strong demand for fixed-income products that is not being satiated. This demand, which is especially robust among pension funds and insurance companies, is likely to play a leading role in driving yields lower. At the same time, U.S. corporations are holding a substantial amount of cash and not feeling any great pressure to borrow money. That dynamic has caused the new corporate debt issuance calendar to lighten up. With lots of cash waiting to be invested, there is a supply-demand imbalance which is pushing the prices of everything from investment-grade corporate bonds to U.S. Treasuries higher. Most areas of U.S. fixed income, with the notable exception of asset-backed securities, municipals and bank loans, are now overvalued. Triple-C rated credit is particularly overvalued but, overall, current spreads of both investment-grade bonds and high-yield bonds have further room to compress.
There is nothing significantly negative to say about prospects for the U.S. economy, especially given that interest rates are on a declining path. Mortgage rates are likely headed lower, making housing more affordable and thereby boosting consumption. Employment levels are trending higher and we are headed into the first summer in years where there is no talk of battles over the U.S. debt ceiling or of a potential federal government shutdown. Finally, several years of buoyant equities markets have boosted the wealth effect among U.S. consumers. After a tough first quarter, the U.S. economy is poised to post much stronger economic growth in the second quarter, possibly 4 percent or higher. U.S. GDP growth for the full year should come in at 3.0 to 3.5 percent.
Of course, with much of the U.S. fixed-income market now overvalued, we must guard against the pitfalls of overvaluation, but, as I have said before, markets that are overvalued and then become even more overvalued are called bull markets.
Improving U.S. Budget Deficit to Cut Treasury Supply
Driven by strong tax receipts and continued spending cuts, the U.S. federal government budget deficit is on a rapidly improving trend. This has important economic implications over the longer term, but the near-term effect might be felt most acutely in the Treasury market. With less need to borrow, the U.S. Treasury Department will likely decrease its issuance of securities over the coming months, adding to downward pressure on yields. Our projections forecast that Treasury issuance could fall to about $350 billion over the next two quarters, about 40 percent lower than one year ago.
U.S. FEDERAL BUDGET BALANCE AND TREASURY ISSUANCE
Source: Haver, Guggenheim Investments. Data as of 3/31/2014. Note: Data seasonally adjusted by Haver Analytics.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.
Investing involves risk, including the possible loss of principal.
*Assets under management is as of 06.30.2020 and includes leverage of $13bn.
Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.
Guggenheim Investments. All rights reserved.
Research our firm with FINRA Broker Check.
• Not FDIC Insured • No Bank Guarantee • May Lose Value
This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.