Van Hoisington, president of Hoisington Investment
Management Co., and Lacy Hunt, its chief economist, have been wagering for more
than a decade that bond yields in the U.S. will fall, thanks to rising debt
that they say inhibits economic growth, retards inflation and pushes down
interest rates. In recent weeks,
Hoisington, which manages $5.4 billion invested mostly in long-term U.S.
Treasury securities, has looked especially prescient, as the potential for
economically damaging deflation in Europe has become a serious concern for
investors.
The yield on 10-year government bonds has tumbled below
1% in Germany for the first time ever and below 2% in the U.S.
for the first time in more than a year, a surprisingly low level at a time of
healthy employment gains in the U.S. Prices rise when yields fall.
While many fund managers and analysts have been predicting
bond yields would move higher as the U.S. economy picks up steam and the
Federal Reserve prepares to wind down its bond-buying stimulus program,
Hoisington disagrees. Mr. Hunt says the U.S. debt burden will continue to weigh
on rates for many years, pushing bond yields down, regardless of actions
central bankers around the globe might take to reflate economic growth.
In the stock market, those predicting doom and gloom for the
global economy have—this past week’s tumult notwithstanding—largely been wrong,
and their investors have missed out on a five-year-long bull market. But it has
been a different story for investors with Hoisington. The $239 million
Wasatch-Hoisington U.S. Treasury Fund is up 28% this year and an average of
5.9% for the last three years.
Over the last 15 years, the Hoisington fund is up an average
of 8.9% a year, compared with a 5.7% average annual return for the broad bond
market, as measured by the Barclays U.S. Aggregate index. Because Hoisington’s
portfolio is loaded with long-term U.S. Treasury bonds highly sensitive to
changes in interest rates, losses can be substantial when the market goes
against them.
The primary trend influencing the prospects for global economic
growth has been and will continue to be burdensome levels of private- and
public-sector debt. By his calculations, public and private debt is 330% of
U.S. gross domestic product, 460% in Europe and 650% in Japan. The danger zone
for economies is in the 250%-to-275% range. Since the financial crisis,
emerging-market countries, too, have been adding debt.
The symptoms of this overindebtedness are subnormal growth,
decelerating inflation and lower long-term interest rates. Against this
backdrop, unlike many bond investors, Mr. Hunt isn’t worried about the Federal
Reserve raising interest rates. Meaningful changes to government spending
and tax policies can be more effective. The result of the debt overhang has
been a U.S. economy stuck in slow-growth mode, with little wage inflation and
shrinking corporate profits.
Mr. Hunt predicts the yield on the U.S. Treasury 30-year
bond ultimately will fall to below 2%, as expectations for higher inflation
vanish.
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