The bull market in U.S. bonds has been going strong for more than 31 years now, one of the longest periods of rising prices for any asset in financial history.
It’s no wonder many analysts are wondering whether we’re approaching the “great rotation,” Street shorthand for moving out of supposedly overpriced government bonds into equities.
Speculation this rotation might be a timely move was stoked by a sharp sell off in bonds earlier in January, when a swoon in prices wiped out an entire year’s worth of interest payments on the U.S. 30 year Treasury in a matter of days.
But one of the savviest plays in the bond space, Hoisington Investment Management, says don’t count on the bull expiring of old age just yet. The Austin-Texas based money manager that’s been pounding the table for bonds for years says the current downward blip in prices is just temporary. The firm also believes the economy remains vulnerable to deflation.
“Today, with long-term Treasury yields around 3 per cent our view remains the same. Interest rates may, will and have gone up based on periodic changes in psychology. However, the underlying fundamentals have insured they have not been able to remain elevated,” the firm says in its latest quarterly market outlook.
Hoisington figures bonds will continue to do well because the economy isn’t strong enough to generate much inflation. A big part of the problem is that de-leveraging is still going on. The individuals and companies remain overindebted, which is causing them to divert money from spending to debt repayment.
The firm has been unwaveringly bullish on bonds for more than a decade, the correct call.
Bond prices move inversely to yields. U.S. Treasuries began rallying way back in Oct. 1982, when yields topped out at 15.2 per cent.
Many analysts fear that the Fed’s unconventional monetary policy, or the purchase of massive amounts of Treasuries and other securities with newly minted money, might eventually trigger a nasty bout of inflation.
These Fed purchases, known as quantitative easing, are the first step in money creation. To date, the Fed has done lots of buying, but inflation hasn’t materialized because the underlying economy is just too weak to get prices rising, in Hoisington’s view.
“Presently, after sixty months of the most massive Fed balance sheet expansion, no evidence of an inflationary spiral can be found. Nor, in our judgment, is one likely to occur. The process of unwinding debt overhangs is a long one, and unfortunately our society continues to pile on debt at near record amounts. This action is deflationary,” Hoisington says.
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