Source: Guggenheim Partners

Guggenheim Partners: It’s Time To Short The Treasury Market ‘Ponzi Scheme’:

In a recent letter, Scott Minerd of Guggenheim Partners argues that thanks to the world’s central banks, the economy — at least in the US — has entered a self-sustaining recovery, and that domestic investments will continue to do well. And like many other top tier investors (too many to count, really) he loathes Treasuries.

In the U.S. fixed income markets, the credit trade has worked very well. As concerns about the recession dissipate, riskier asset classes are rallying. However, while below investment- grade credits continue to look attractive, Treasury yields remain unsustainably low. I think the Fed’s policy actions will keep rates lower than they normally would be, but I believe the improving U.S. economy will put upward pressure on rates over the next six to twelve months. Essentially, what we have right now in the Treasury market is a Ponzi scheme. If the market had its way, Treasury rates would be at least 100 basis points higher than they are today. But because there is a buyer out there who is willing to keep purchasing these securities, even though it doesn’t make any economic sense as a prudent investment, the market has reached levels that wouldn’t be sustainable if free market forces were allowed to prevail.

Bianco Comment:

Larry Fink hates bondsWarren Buffett hates bondsJeremy Siegel has hated bonds since George Bush Sr. was in office (1994).  Nassim Taleb thinks every human on the planet should be short bonds.  Leon Cooperman wouldn’t be caught dead owning bonds.  99% of economists are bearish on bonds.  Now Guggenheim chimes in on hating bonds as if we have never heard this before.

The problem is that we have heard it over and over and for nearly a decade.  And, for nearly a decade, this call has been dead wrong.  The long bond has had a 34% total return in the last 12 months versus a 5.1% return for the S&P 500 over the same period.  The bond market has also outperformed stocks over the last 30 years for the first time since the Civil War.

At some point the bond bears are going to be right.  But after a decade of crying wolf, it is hard to listen to these calls.

Category: Fixed Income/Interest Rates

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

25 Responses to “Who Hates Treasuries? Everybody!”

  1. Global Eyes says:

    Today’s lesson as seen by me: America’s $15 trillion debt has been a wet blanket stifling growth in the stock market since the Civil War. Today, the same thing is preventing a new New Deal, putting a lid on future expansions. Interest rates cannot rise 700 basis points because recoveries become muted. Conclusion: screw stock prices ; pick the top in interest rates and make millions until the next Civil War!

  2. dead hobo says:

    Mr Bianco stated:

    The long bond has had a 34% total return in the last 12 months versus a 5.1% return for the S&P 500 over the same period. The bond market has also outperformed stocks over the last 30 years for the first time since the Civil War.

    At some point the bond bears are going to be right. But after a decade of crying wolf, it is hard to listen to these calls.

    Dude, don’t you pay attention to why things work as they do or is Wall Street, to you, just a collection of mysterious shit that just happens and following this mysterious shit has become a livelihood?

    First, bond math. Bond prices rise when rates fall. Bond prices fall when rates rise. This is fundamental. It’s taught in all intro to accounting and intro to finance classes.

    Now, bonds are considered a safe haven when stocks get frightening. As cash moves from stocks to bonds, this bids up the price of bonds and rates fall. These rising prices are also known as ‘capital gains’. Please write this down. Vice versa, when equities look safe again, cash flows out of bonds and and back to stocks, causing rates to rise again. This is why rates for long term bonds have fallen recently. As QE boosted equity markets ran out of fuel, cash went from stocks to bonds, causing bond prices to rise. As equity markets fell last may into last fall, bond prices soared. Greek scares helped a lot, too.This is all highly predictable and I made money doing it. I took profits by cashing out.

    Now, long term bonds can not fall to 0%. Thanks to Operation Twist where the Fed bought long term bonds with the intention of buying down long term rates, long term rates did not start to rise when the equity markets started to recover late last year. Operation Twist ends in a few months. Long term rates will probably rise back to about 4% to 4.5% at that time if not before unless Europe has another catastrophe or aliens invade from outer space.

    Putting it all together, stocks and bonds have an inverse relationship. Long term bonds have nowhere to go but down at this time. Smart investors already know this and cash is moving steadily from bonds to equities. Capital gains profits are being taken on bonds as I write this.

    You’re welcome.

  3. endorendil says:

    US treasuries only, please. The bears have already been right about any other country’s treasuries. The reason why treasuries don’t obey logical rules is that they redefine TBTF. If bond prices rally to reflect the fact that the US federal government owes 700% more than its total yearly income, the US defaults (after a fairly short time of this kind of fiscal sanity). But treasuries are held by everyone, and a default, a greek-style restructuring or a massive devaluation would simply pull the rug out of the financial system. It’s the third rail of the international financial market. So don’t read anything into the continued strength of treasuries.

  4. dead hobo says:

    Mr Bianco,

    Here’s a few other explanations that explain ‘the mysterious shit of wall street’ …

    * Equities usually rise in price at the end of each quarter. This phenomena also has a name because it’s so common … end of quarter window dressing. Look for it in a couple of weeks.

    * Markets evolve over time and the stock market of 1975, or 1982, or 2003, or other date is only a little like the market today even though they still look a lot alike superficially. Liquidity rules this market. Add some and watch equities take off. Remove it by scaring the crap out of people and watch people sell everything for whatever they can get. Today we are awash in liquidity, all scares are gone, the US economy is improving and both Europe and Asia have nowhere to go but up (although this may not start immediately). Cash reserves exist in bonds that need to move to either cash or stocks (guess which one will win). Rising prices will attract cash from the sidelines. As will converts from the wall of worry.

    * Robots control prices and trade, so hyperbolic rises followed by quick corrections are less likely than in the past.

    * Earnings season is only a month away and even companies that present statements that look like flaming bags of shit will ‘beat expectations,’ allowing sales pundits to hype their funds and boost indices.

    * In summary, markets rise today without a compelling reason to sell. Sideways is the new correction. At this moment, there is no compelling reason to sell equities as Europe appears settled for the time being.

  5. Non Sequor says:

    dead hobo,
    I feel the same way that it’s silly to think about bonds continuing to go higher since at this point anyone holding a long term treasury to maturity has a 99% chance of having a loss on a real basis, but it’s also becoming clear at this point that logic affects bond markets the same way that gravity affects a Wile Coyote cartoon. They ran off the cliff a while ago, but I guess most of them haven’t looked down yet, or they just don’t care because they don’t plan on holding these things to maturity anyway and are using them as an asset to hold when they want to hide from equities scares as you noted.

    I guess that Bianco’s point is that even though the bears are right and at some point bonds have to go down, that could be years away, especially since it’s clear that the underlying problems which keep driving scared money to flee into bonds haven’t been resolved yet. And after Operation Twist, the Fed may hatch more schemes for pulling down long term rates. They’ve exhausted conventional options, so my guess is at this point they’ll use a particle accelerator to warp the fabric of time itself, pulling the future into the past so that they can pierce the 0 barrier. As I said, that’s just a guess, but you shouldn’t rule out the possibility that the Fed will do something that might destroy the world to pull down interest rates.

    Just my young and uninformed opinion, but I’m kind of wondering if we need a year of double digit inflation before treasuries will have a meaningful use as an asset that can be held to maturity.

  6. dead hobo says:

    Non Sequor Says:

    I guess that Bianco’s point is that even though the bears are right and at some point bonds have to go down, that could be years away, especially since it’s clear that the underlying problems which keep driving scared money to flee into bonds haven’t been resolved yet.

    Financial engineering and European panics caused bonds to rise in price. Bonds can not rise in price any more unless the world ends. Double digit inflation is not likely, but would cause prices to fall a lot as the bonds would be worth squat. This would cause capital losses for all bond holders. Interest rate risk would cause bonds to be a waste of money to hold unless people expect even worse times ahead and even bigger asset oriented panics. Cash has nowhere to flow but out of long term bonds at this time. Please identify the next likely panic and explain why it would cause an equity sell off. BTW, gold is selling off for good reason (it’s basically worthless) and cash will go into equities from gold sales.

  7. Ted Kavadas says:

    I’m of the opinion that Treasuries, as well as the entire bond market, is an enormous asset bubble.

    This bubble is extraordinary in many regards, perhaps most notably in size of assets as well as duration. The bubble has gone on for so long that it seems as if many have forgotten the adverse ramifications of higher interest rates, both from an investment standpoint as well as from the standpoint of the economy in general.

    For those interested, my latest post on the bond bubble:

  8. rd says:

    Treasuries will enter a major bear market when one of two things happens:

    1. Helicopter Ben can push fed funds rate above 1% without crushing the banks and the economy; or

    2. The US ceases being the primary reserve currency, becomes Greece etc., can’t (or won’t) sustain its payments, and the rest of the world stops buying Treasuries.

    Until then we are just rolling along in a rolling depression with decining or flat bond yields.

  9. VennData says:

    Bond bears really haven’t been in large numbers prior to 2010. Now they are, except for the folks who continue to buy them.

    Bond prices are dropping, they will continue to drop. Suggesting you stay in because band bears have been wrong ignores the valuation problem bonds have, ignores the economy’s fundementals, and ignores the emotions of the talking heads who missed the equity rally and want equities to collapse so they can buy back in.

  10. AHodge says:

    i ve long since given up trying to short them-painfully
    a short bond position is not the first way i would trade recovery
    i might even go long here tactically–a 2.05 1.80 ten yr yield trading range has worked a litle for me lately
    i think the reasons yields got this low- the final last hurrah of decline unless depression
    1 a huge shortage of total fixed income supply as the securization markets still completely dysfunctional
    “asset backed” etc was over half of fixed income supply in 2007
    2 tight markets have been drained even further by the QEs all over
    and this is ongoing with the yield twist stuff and sterilized QE highlighted lately by GS and others

    Im tempted to write a bunch more bond calls with the equivalent of a 1.5 ten year yield?
    of course doin this over the last two years w the 2.5 yield
    i thot we would never fall below
    cost a lot of me money

  11. AHodge says:

    and of course
    3 bad global economies and little inflation-but we all know those.

  12. AHodge says:

    not right away
    but probably in less than year and a half
    there may be a big bond short trade
    key would be securitization on a roll again, even an unhealthy fake bubble roll.
    thats my forecast

  13. johnhaskell says:

    4 comments all of which take one or the other tack of
    -market is run by computers
    -market is run by behind-the-curve-fools
    -market is run by Bernanke

    Not a single commentator uses the words “deflation” or “deleveraging”

    Executive summary: trend remains intact

  14. obsvr-1 says:

    The bond market will sustain its record strength as long as Bernanke continues to suck them onto the FED balance sheet; since the FED has a virtually endless supply of money they can continue this well into the future. .

    Also, don’t forget the Fiscal rascals are adding another $T+ annually! to the outstanding bond pool, which in a non-manipulated market would put downward pressure on the bonds, so the FED fire hose of money has to continue to offset that pressure as well.

    The poor fixed income folks and savers are taking it on the chin, can you imagine what happens on the reversal and they have to redeem their bonds. I clearly see the TBTF snapping up the bonds at high discount to then profit on the rebound once those on the edge are pushed over.

    The end of the movie is being written, I just don’t see where it ends well.

  15. derekce says:

    A hard landing in China would send people back to bonds, but this 30 year bond rally is in the bottom of the ninth, whether that happens or not.

  16. Joe Friday says:

    Robert Kessler (CEO, KESSLER INVESTMENT ADVISORS), who has correctly called the treasury bond moves for years (and been called a heretic all along the way), sees the yield on 30-year treasuries dropping by about an additional hundred basis points, which would result in a further return of about 25%-30%.

  17. Joe Friday says:

    Oh, and Kessler also points out that most of the people who are currently advising to buy equities are themselves buying treasuries.

  18. LizSunValley says:


    Your post is the definition of “complacency”–I’m not trying to be insulting, just to shine a light on your own emotions so you can use that in your trading.

    In contrast to your comment “everyone hates bonds”,the average investor has been extremely risk-adverse for a long time (hence the explosion of bond funds, and the fact that the average investor has been too scared to buy stocks, but just fine with bonds because they are seen as “safer”). Capitulation–”don’t look just buy!”–by everyone from my mom to Pimco tells me it’s so. In addition, have you looked at the MOVE Index of 2,5,10 and 30 year interest rate instrument volatility? It’s plummeted to levels not seen since the summer of 2007–and we all know what happened right after that to bonds.

    Please, reread the last part of your post and then see the correlation with the chart of the MOVE Index

    On both counts, you will see that complacency has reached actionable levels. Yes, it is finally an excellent bet to short treasuries! Don’t close your mind to this.

  19. Non Sequor says:

    Dead hobo,
    There’s not a lot of room to maneuver but in the short term, long term treasuries can still go up. The rally on equities is being driven by a lack of bad news, but the lack of good news should give one pause.

    They can’t go up for another 30 years, and I’m almost certain that at some point people are going to be taking nasty losses on them, but I’m not sure if that’s going to happen in the next five to ten years. And what good is being right about something if by the time you’re right, people have forgotten your prediction?

  20. Joe Friday says:


    PIMCO ?

    Are you kidding ?

    Guess you missed when Wrong-Way Bill Gross decided to sell all of his government treasuries and announced he was placing his bets on interest rates rising.

    His ‘Total Return Fund’ sold short about $2.2 billion of Treasuries that mature in about 10 years and $5.8 billion of agency debt that comes due in 2041, AND also got on the wrong side of another $15.2 Billion in interest-rate swaps.

  21. I don’t think anybody should talk about US Treasuries unless they are saying and acting on that same belief regarding Japanese Bonds. I think Japanese Bonds will be a leading for US bonds…..

  22. LizSunValley says:


    That was my point–even Pimco (who had been bearish on rates) capitulated and bought.

  23. socaljoe says:

    “The bond market has also outperformed stocks over the last 30 years for the first time since the Civil War.”

    That alone is enough reason to be bearish.

    Since we’re talking about decades long secular trends, precise timing is impossible to predict.

  24. Joe Friday says:


    That was my point–even Pimco (who had been bearish on rates) capitulated and bought.


    I was picking up more on your “long time” reference, as Gross has been wrong again and again, and his “capitulation” was out of desperation not sentiment.

  25. Jim Bianco says:

    Hey guys thanks for the comments ….

    In this comment all I’m trying to say is the bond bearish arguments, many of which were articulated above, have been made for many years. And these arguments have been wrong for years.

    If someone has been screaming “short Apple” when it first crossed above $200 the crowd would laugh them out of the business. Why don’t we do it to the bond bears? Why are they allowed to be horribly wrong and lose tons and tons of money and they we torture arguments to tells us they are right?

    Why not start with Nassim Taleb, Warren Buffett, Leon Cooperman and Jeremy Siegel have been completely wrong about bonds, and those that followed their advice lost their shirt? Then go about telling me why these same arguments were wrong years ago will suddenly be correct now?

    If you’re a true contrarian, you would understand the bond bearish argument has been a disaster for a decade.