Hoisington Sees Treasuries Escaping ‘Inflationary Psychosis’

Inflation fears that just drove the Treasury market’s biggest quarterly loss in decades are a “psychosis” that will fade over the course of the year, according to Hoisington Investment Management Co., among the biggest U.S. bond bulls.

“Contrary to the conventional wisdom, disinflation is more likely than accelerating inflation,” according to latest quarterly report from the firm, which manages about $5 billion in Treasuries. After moving higher in the second quarter, the annual inflation rate “will moderate lower by year end and will undershoot the Fed Reserve’s target of 2%,” and “the inflationary psychosis that has gripped the bond market will fade away.”

Hoisington, whose leadership includes founder Van Hoisington and chief economist Lacy Hunt, rode its optimism to huge returns last year. Its Wasatch-Hoisington Treasury Fund gained 20%, more than any other actively managed U.S. government bond fund, according to data compiled by Bloomberg. But this year has been a completely different story amid the carnage in Treasuries, with the fund down about 15% since Dec. 31, trailing all peers, Bloomberg data show.

It’s had an annual average return of about 7.5% since its 1986 inception.

While U.S. GDP is likely to grow in 2021 at the fastest pace since 1984 -- and possibly since 1950 -- several factors will restrain inflation, Hoisington said. They include:

  • Inflation is a lagging indicator, reaching lows an average of 15 quarters after recessions end
  • Productivity tends to rebound vigorously after recessions
  • Supply-chain restoration will be disinflationary
  • Pandemic has accelerated technological advancements
  • Growth numbers don’t reflect reflect the costs of rampant business failures

As inflation “is the key determinant for the level and direction of long term Treasury yields,” yields also tend to reach cyclical lows long after the start of recessions, with an average lag of 76 months since 1990, Hoisington said. “While no two cycles are ever alike, the trend in long bond yields remains downward.”

©2021 Bloomberg L.P.

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