Does the Bond Market Resemble a Ponzi Scheme?


A Ponzi scheme is an investing scam promising a very high rate of return that is too good to be true. Charles Ponzi, an Italian con artist, became infamous for the scheme by paying early investors with money from later investors. The game of musical chairs can continue as long as new participants join, but the fraud eventually comes to an end. In today’s economy, there is at least one asset manager that believes the Treasury market resembles a Ponzi scheme.

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Scott Minerd, global chief investment officer at Guggenheim Partner, recently reminded clients that many investors are ignoring fundamentals and purchasing bonds purely on the belief they can sell them tomorrow for more than they paid today. This is being accomplished through massive intervention by the nation’s central bank.

Minerd explains: “The U.S. Treasuries market could now be described as a Ponzi market. The only reason investors would buy Treasuries today is that they expect the Federal Reserve will buy them at higher prices in the future. This reasoning will come unstuck, however, once the Fed curtails its asset purchase program. We do not know when the Fed will taper QE, but the longer its expansionary policy continues, the more volatility-inducing pressure will build. That means stock and bond markets appear to be in for a rough ride over the next six months or so.”