THE CORE CONUNDRUM - Guggenheim Partners

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The Impact of the Financial Crisis Rise in U.S. Treasury Debt Outstanding since the Financial Crisis $20Tn 2001 – 2006 2007 – 2012 46% 162% projected 68% $15Tn $10Tn $5Tn $0Tn 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2022 As the U.S. government’s fiscal deficit soared from 1.3 percent of GDP in 2007 to 10.4 percent of GDP by 2009, the resulting impact was a significant rise in Treasury issuance. Treasury debt outstanding grew from $4.5 trillion in 2007 to $11.3 trillion by the end of 2012. The Congressional Budget Office (CBO) projects an additional 68 percent increase to $18.9 trillion over the next ten years. Source: SIFMA, Congressional Budget Office. Data as of 12/31/2012. The Evolution of the Core Fixed-Income Universe Reweighting of the Universe toward Risk-Free Assets 19.0 % Treasuries Agency MBS Agency Bonds Investment-Grade Bonds Non-Agency MBS Taxable Municipals ABS 34.5 % 2007 2012 The massive increase in Treasury debt has reshaped the core fixed-income universe. Since bottoming in 2007 at 19 percent of core bonds outstanding, Treasuries nearly doubled to 35 percent of the universe by 2012. Combined with agency debt, U.S. government assets now comprise almost two-thirds of the core fixed-income universe, and nearly 75 percent of the Barclays Agg. Source: SIFMA, Credit Suisse. Data as of 12/31/2012. 4 | THE CORE CONUNDRUM GUGGENHEIM PARTNERS
Assessing the Relative Value of the Barclays Agg Historical Yield per Unit of Duration 4% 3% 0.3 % 12/31/2012 2% 1% 0% 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Currently, the Barclays Agg is the least attractive it has ever been as measured by yield per unit of duration. Given the Fed’s recent pledge to keep rates low at least until specific unemployment or inflation targets are reached, the Index’s unattractiveness from an investment standpoint is likely to continue in the near term. Source: Barclays. Data as of 12/31/2012. Fiscal Policy Reconfiguring Composition of Barclays Agg Since its creation in 1986, the Barclays U.S. Aggregate Bond Index (the “Index” or the “Agg”) has become the most widely used proxy for the U.S. bond market with over $2 trillion in fixed-income assets managed to it. Inclusion in the Agg requires that securities be U.S. dollar-denominated, investment-grade rated, fixed-rate, taxable, and meet minimum par amounts outstanding. In 1986, the fixed-income landscape primarily consisted of U.S. Treasuries, agency bonds, agency MBS, and corporate bonds – all of which met these inclusion criteria. Therefore the Agg was a useful proxy for the universe of fixed-income assets. However, the fixed-income universe has evolved over the past twenty years with the growth of sectors such as asset-backed securities and municipals. Over the past five years, the composition of the Barclays Agg has been altered by the massive volume of Treasuries issued in response to the U.S. financial crisis. The sheer glut of Treasuries and their increasingly dominant representation in the Index is a trend unlikely to reverse anytime soon. The need to fund government shortfalls – present and future – is astonishing. The U.S. Treasury debt 5 | THE CORE CONUNDRUM GUGGENHEIM PARTNERS
Page 1 and 2: PORTFOLIO STRATEGY RESEARCH | FEBRU
Page 3: SECTION 1 The Core Conundrum In an
Page 7 and 8: SECTION 2 Coping with New Market Re
Page 9 and 10: Nominal Total Return Era of “Retu
Page 11 and 12: through overcollateralization, exce
Page 13 and 14: Barbell means to structure a portfo
Page 15 and 16: The Changing of the Guard The Futur

THE CORE CONUNDRUM - Guggenheim Partners

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