Global CIO Commentary by Scott Minerd
The severe dislocation in fixed income markets is the result of investors’ surprise over the faster-than-expected pace at which the Federal Reserve indicated it plans to taper and eventually end quantitative easing (QE). There are parallels between this event and the bond market crash of 1994 when then-U.S. Federal Reserve Chairman Alan Greenspan increased the federal funds rate by 25 basis points. In the subsequent bond-market rout – the worst since the Great Depression – investors immediately began re-pricing bonds to where they assumed rates would be at the end of the tightening cycle, rather than waiting for interest rates to incrementally move to their new levels. Long-term rates doubled over the next six months and liquidity significantly dried up in the bond market.
When looking closely at the latest projections by the Federal Reserve, their outlook on the unemployment rate by the end of the year suggests that they believe economic activity will accelerate as we head into the summer. I do not subscribe to this view, as we are already seeing pressure on housing and the broader economy from higher interest rates, and the recent spike in yields’ negative impact is likely to continue to show up in the economic data over the summer. Adding all this up, there remains a strong possibility that the Fed will shift the tone of its guidance from QE tapering back to QE expansion or extension before the end of 2013.
Liquidity Deterioration in the U.S. Corporate Bond Market
As a result of increased banking regulations, U.S. primary dealers’ positions of corporate securities, including commercial paper, investment grade, and high-yield corporate bonds, have declined substantially from the peak of $260 billion in 2007 to the current level of $68 billion. This reduction in bond inventories could prove to have a negative impact on market liquidity. Investors may have difficulty unwinding their positions amid rising interest rates, as dealers shrink their corporate bond holdings, pushing bond yields higher.
U.S. PRIMARY DEALER POSITIONS OF CORPORATE SECURITIES*
Source: Federal Reserve Bank of New York, Bloomberg, SIFMA, Guggenheim Investments. *Note: Corporate securities include commercial paper, investment grade, and high-yield corporate bonds. Data for 2013 as of 1Q2013.
Economic Data Releases
GDP Revised Down Sharply, Housing Market Continues to Strengthen
- First quarter GDP was revised down to 1.8% annualized growth, led by a downward revision in consumer spending from 3.4% to 2.6%.
- New home sales continued to accelerate in May to an annualized pace of 476,000 homes, the highest since July 2008.
- Existing home sales jumped 4.2% from April to May, reaching an annualized pace of 5.2 million, the best since November 2009.
- The S&P/Case-Shiller 20-city home price index showed an annual increase of 12.1% in April, the highest level since March 2006.
- Mortgage applications fell 3.0% for the week ended June 21st, the sixth decrease in the last seven weeks.
- U.S. durable goods orders expanded 3.6% in May, better than forecast. Orders excluding transportation were up 0.7% and non-defense capital goods orders excluding aircraft rose for a third straight month.
- The Conference Board consumer confidence index surged to 81.4 in June, the best since January 2008.
- Initial jobless claims rose 18,000 to 354,000 for the week ended June 15th.
- Regional Fed indices were generally positive, with the Philadelphia, Richmond, and Dallas indices all rising more than expected.
- The leading indicator index increased just 0.1% in May, driven by the three financial indicators.
European Confidence Up, Chinese Manufacturing Activity Worsens
- Consumer confidence in the euro zone improved for a seventh straight month, rising to a 22-month high of -18.8 during June.
- France’s manufacturing and services PMIs improved more than expected in June, while Germany’s manufacturing unexpectedly fell, and the euro zone composite PMI rose for a third consecutive month to 48.9.
- The June IFO survey of Germany’s business climate increased for a second consecutive month to 105.9.
- Consumer confidence in Italy surged from 86.4 to 95.7 in June, the highest level in more than one year.
- Retail sales in Italy fell for an eighth consecutive month in April, down 0.1%.
- China’s HSBC flash manufacturing PMI disappointed in the June reading, showing an accelerated contraction of manufacturing activity at 48.3.
- Japanese exports jumped 10.1% in May from a year earlier, the best annual gain since December 2010.
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 9.30.2021 and includes leverage of $17.9bn. 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, Guggenheim Partners Fund Management (Europe) Limited, Guggenheim Partners Japan 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.