That Which Is Unsustainable Will Not Be Sustained
Scott Minerd Chairman of Guggenheim Investments, Guggenheim Partners Global Chief Investment Officer December 2022
Japanese Government Debt Levels Are In a League of Their Own
250%
100%
150% 2006 2008 2010 2012
200% 2018 2020
2002 2004
2014 2016
Source: Guggenheim Investments, Haver Analytics. Data as of 12/31/2021.
Please see disclosures and legal notice at end of document.
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U.S., U.K., Eurozone, and Japan Central Government Debt as a % of Gross Domestic Product (GDP) 0%
50%
U.S. U.K. Eurozone Japan
Total Debt Will Resume Climbing This Year
450%
350%
300%
250%
200%
400% 2004 2006 2008 2010 2012 2014 2016 2018 2020
2002
Source: Guggenheim Investments, Haver Analytics. Data as of 12/31/2021.
Please see disclosures and legal notice at end of document.
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U.S., U.K., Eurozone, and Japan Central Government Debt + Private Nonfinancial Sector Debt (% GDP) 150%
U.S. U.K. Eurozone Japan
Government Interest Expenses Have Been Declining …
Government Interest Expense (%
Source: Guggenheim Investments, Haver Analytics. Data as of 12/31/2021. Note: All interest expense figures are central government except Eurozone, which is general government.
U.S. U.K. Eurozone Japan
Please see disclosures and legal notice at end of document.
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GDP) 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
… But They Will Increase Again as Yields Rise and GDP Growth Weakens
Government
U.S. U.K. Eurozone Japan
Source: Guggenheim Investments, Haver Analytics. Data as of 12/31/2021. Note: All interest expense figures are central government except Eurozone, which is general government.
Please see disclosures and legal notice at end of document.
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4% 6% 8% 10% 12% 14% 16% 18% 20%
Interest Expense (% Government Revenues) 0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1
2002 2005 2008 2011 2014 2017 2020 2023 2026
Bank of Japan May Be Reaching the Limits of Its Support for JGBs
Central Bank Assets (% GDP)
Federal Reserve
Bank of England
European Central Bank Bank of Japan
Source: Guggenheim Investments, Haver Analytics. Data as of 09/30/2022. JGB = Japanese Government Bond.
Please see disclosures and legal notice at end of document.
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0% 20% 40% 60% 80% 100% 120% 140% 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
BOJ, ECB, and BoE All Hold About Half of Outstanding Government Bonds
Central Bank Holdings as a Share of Outstanding Government Bonds
Bank of Japan
European Central Bank
Bank of England
Federal Reserve
Source: Guggenheim Investments, Haver Analytics. Bank of England data as of 06/30/2022; other data as of 09/30/2022.
Please see disclosures and legal notice at end of document.
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0% 10% 20% 30% 40% 50% 60% 1980 1985 1990 1995 2000 2005 2010 2015 2020
Bank of Japan Operates With Only a Nominal Capital Base
Central Bank Capital (Local Currency Billions)
European Central Bank
Federal Reserve Bank of England Bank of Japan
Source: Guggenheim Investments, Haver Analytics. Data as of 09/30/2022.
Please see disclosures and legal notice at end of document.
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0 20 40 60 80 100 120 2000 2005 2010 2015 2020
… As It Buys More JGBs and Its Market Cap Decreases
Bank of Japan Market Capitalization (¥ bn)
Source: Guggenheim Investments, Bloomberg. Data as of 10/31/2022.
BOJ market cap
Please see disclosures and legal notice at end of document.
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0 100 200 300 400 500 600 700 1990 1995 2000 2005 2010 2015 2020
The Bank of Japan Becomes Increasingly Levered …
Ratio of JGBs Held by the Bank of Japan / Bank of Japan Market Capitalization
Ratio of JGBs held by BOJ / BOJ market cap 1990: Ratio of 34x 2022: Ratio of 22,262x
Source: Guggenheim Investments, Bloomberg, Haver Analytics. Data as of 10/31/2022.
Please see disclosures and legal notice at end of document.
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0,000x 5,000x 10,000x 15,000x 20,000x 25,000x 1990 1995 2000 2005 2010 2015 2020
Central Banks Face Large Losses as Bond Yields Rise
Please
see disclosures and legal notice at end of document. 11
0% 5% 10% 15% 20% 25% 30% 35% 40% +1 +2 +3 +4
Source: Guggenheim Investments, Haver Analytics, New York Fed. Guggenheim estimates as of 11/28/2022. Estimated Mark-to-Market Losses on Bond Holdings as a Function of Bond Yields (% of GDP)
MarktoMarket Loss (% of GDP) Portfolio Yield Increase, in Percentage Points European Central Bank Federal Reserve Bank of England Bank of Japan
The Days of Large Fed Profits Are Over
Source: Guggenheim Investments, Haver Analytics. Data as of 11/23/2022.
Please see disclosures and legal notice at end of document.
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$0 $2 $4
2015
2017
Weekly Federal Reserve Remittances to the U.S. Treasury (USD Billions) -$10 -$8 -$6 -$4 -$2
2011 2012 2013 2014
2016
2018 2019 2020 2021 2022
What Is Unsustainable Will Not Be Sustained
BOJ
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buys
maintain yield
printing
JGBs to
target by
yen
yen
value
yen
buys yen to support currency by selling reserves
of yen falls and yen strengthens, putting pressure on JGB yields
Supply of
rises and
of
falls BOJ
Supply
Source: Guggenheim Investments
Please see disclosures and legal notice at end of document.
Inflation Rises
JGB announces new yield target
BOJ portfolio declines in value Market challenges the new JGB yield cap
BOJ intervenes to stabilize market by buying JGBs
Supply of yen rises and inflation increases
Source: Guggenheim Investments
Please see disclosures and legal notice at end of document.
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Inflation Rises Further
BOJ sets new target for higher JGB yields BOJ portfolio declines further in value Market challenges the new JGB yield cap
BOJ defends JGB yield by increasing JGB purchases
Supply of yen rises and inflation increases further
Source: Guggenheim Investments
Please see disclosures and legal notice at end of document.
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Option 1: BOJ Stops Capping of JGB Yields
JGB
yields rise
Financial instability
ensues
BOJ attempts to reduce portfolio holdings of JGBs to reduce money supply increasing supply of JGBs in the market and causing more upward pressure on rates
Source: Guggenheim Investments
Please see disclosures and legal notice at end of document.
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Option 2: BOJ Has More Liabilities Than Assets (namely JGBs) and Cannot Liquidate Portfolio
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Source: Guggenheim Investments BOJ calls on government for support Government can raise taxes putting downward pressure on economic activity Government attempts to issue bonds putting more pressure on JGB prices
Please see disclosures and legal notice at end of document.
Option 3: BOJ Can Engage in Reverse Repo or Matched Sales
Reverse repo rate results in higher money market yields which puts more downward pressure on economic activity
Rate on repo much higher than yield on JGB portfolio depleting BOJ capital further
Source: Guggenheim Investments
Please see disclosures and legal notice at end of document.
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Disclosures and Legal Notice
Guggenheim Investments represents the following affiliated investment management businesses: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.
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