Hoisington Investment Management Co., a firm with a longstanding reputation for bullishness on U.S. Treasury bonds, has made a rare shift in its stance. In its latest quarterly investment report, the firm suggests that the structural backdrop of persistent U.S. fiscal deficits and rising capital demands may lead to a sustained period of higher inflation and elevated yields on long-term Treasuries. This implies a fundamental change from the bond bull market environment that has prevailed for over three decades.
The report, authored by the firm's founder Van R. Hoisington and chief economist Lacy Hunt, states that larger fiscal deficits and increasing financing needs are reshaping the bond market landscape. They forecast a rising trend for inflation and long-term U.S. Treasury yields. This view marks a significant departure from the firm's long-held investment philosophy.
For more than 30 years, Hoisington has been recognized on Wall Street as one of the most steadfast bulls on U.S. Treasuries, consistently betting on declining long-term yields and garnering significant market attention for this view. The report now indicates that America's ballooning debt load is prompting investors to demand a higher risk premium for holding U.S. government bonds. This suggests the interest rate environment has diverged from the era spanning 1990 to 2020, which was characterized by a persistent downtrend in yields and a sustained bull market in long-term bonds.
Concurrently, Hoisington anticipates that the long-term equilibrium level of U.S. inflation is shifting upward into a range of 3.5% to 4.5%, and warns of risks that inflation could again exceed 5%. This assessment is reflected in the firm's portfolio adjustments. Regulatory filings show that the effective duration of the fund's portfolio was as high as 20.88 years as of the end of last September. By the end of March this year, that measure had dropped sharply to 4.7 years, and by June 30, it had fallen further to under one year. In contrast, the Bloomberg U.S. Aggregate Bond Index currently has an average duration of about 6 years. Effective duration is a key metric for gauging a bond portfolio's sensitivity to interest rate changes; a shorter duration implies lower exposure to the risk of rising rates.
Hoisington began adjusting its strategy in the first quarter of this year. At that time, following U.S. military strikes against Iran in late February, international oil prices surged sharply. This fueled market expectations for higher inflation and further monetary tightening by the Federal Reserve, pushing U.S. Treasury yields higher. Data shows the yield on the 30-year U.S. Treasury bond approached 5.2% in May, reaching its highest level since 2007. As of Thursday, that yield remained around 5.12%.
In fact, since the 30-year Treasury yield fell below the historic low of 2% during the 2020 pandemic, long-term U.S. bond yields have generally trended higher in a volatile pattern, with only brief pullbacks during certain periods. Over the same timeframe, a global government bond index remains down approximately 19% from its 2020 peak.
For many years, Hoisington concentrated client funds in long-term Treasury bonds and zero-coupon securities, betting on a continued decline in yields. This strategy performed exceptionally well during the bond rally but suffered significant setbacks during periods of rapidly rising rates. As of June 30 this year, the fund's annualized return since inception remains 5.38%, but its annualized loss over the past five years stands at 8.7%. Concurrently, the firm's assets under management have declined from roughly $5 billion in 2020 to under $2 billion last year.
Hoisington believes the ongoing surge in U.S. capital expenditures will continue to exert upward pressure on long-term interest rates. On one hand, investments in artificial intelligence (AI) are driving rapid growth in corporate financing needs. On the other hand, the persistently expanding U.S. government fiscal deficit also necessitates the issuance of more Treasury bonds for funding. Together, these factors are increasing the supply of bonds in the market.
Jeffrey Gundlach, CEO of DoubleLine Capital and often referred to as the "Bond King," recently commented that the 30-year U.S. Treasury yield persistently testing the key 5% resistance level appears "difficult to sustain" over the long term. He also noted that even the long-term bull Lacy Hunt has now turned bearish, underscoring how significantly the market environment has changed.
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