A Prominent Bond Bull Says Treasuries Rally Isn’t Over Yet
(Bloomberg) -- The conventional wisdom that inflation will be rekindled in the U.S. -- ending the massive Treasuries rally and driving up yields -- is bunk, according to a Texas fund manager whose three-decade bullish stance on bonds propelled another banner year in 2020.
Being bullish on Treasuries is still warranted because the economic harm from the pandemic “will take years” to repair, Hoisington Investment Management Co. said in its latest quarterly report. Reasons to trust the bond rally include “massive” global debt loads that blunt the impact of monetary policy and the diminished ability of government spending to help the economy, the fund manager said.
“Presently, the overwhelming judgment of market forecasters is that interest rates will rise throughout 2021 owing to the expectation that additional fiscal stimulus coupled with an easy monetary policy will create an inflationary cocktail as pandemic related shutdowns lessen,” Hoisington said.
The contrarian decision “to maintain a bullish stance on long U.S. Treasury yields is not whether rates can rise, since it happens transitorily every year, but whether they can stay elevated,” according to the report. Unless Congress changes the Federal Reserve’s powers, “long dated U.S. Treasury rates will eventually gravitate to lower levels as inflation continues to recede.”
Hoisington, whose leadership includes founder Van Hoisington and chief economist Lacy Hunt, manages about $5 billion in Treasuries. The firm’s Wasatch-Hoisington Treasury Fund returned 20% last year, more than any other actively managed U.S. government bond fund, according to Bloomberg data. It’s had an annual average return of 8% since its 1986 inception.
Bonds have dropped in recent weeks, driving up yields, on hopes that a unified Democratic government might boost the prospects for economic stimulus. The rate on 30-year Treasuries climbed to 1.91% on Jan. 12, the highest since March.
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Regarding the economy, gross domestic product increases that reflect the equivalent of replacing broken windows will leave it “worse off than if no damage was incurred,” Hoisington said.
Fiscal multipliers -- the potential for government spending to spur the economy -- appear to be disabled in part by high debt loads, but also by “the nature of the debt financed operations,” the fund manager added. They generally haven’t included investment in infrastructure, health and education, which can boost GDP.
Total U.S. public and private debt rose 11% in 2020 to $406 trillion, which will restrain growth “despite the best efforts of monetary and fiscal policy,” Hoisington said.
These factors will restrain inflation, “the primary determinate of the yield on long dated U.S. government debt,” allowing the bull run in long-maturity Treasuries to continue, the firm said.
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