HOISINGTON: THE HARD ROAD AHEAD
18 January 2010 by Cullen Roche
9 Comments
As always, excellent reading here from Hoisington Investment Management:
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Comments
The risk reward relationship of long-term US treasury debt doesn’t seem to be worth buying at these levels except for diversification. Hoisington doesn’t address the potential effect of large foreign ownership and changes in the dollar’s value on interest rates.
I doubt that the US will see either hyerinflation or steady deflation. Without continued deflation or another major financial crisis how much lower can long-term treasury rates really go?
Agree with Rob’s comments……and I might add….
Authors suggest that interest rates can’t rise with inflation low…..but what about the impact of higher rates being needed to attract buyers of our debt as debt levels continue to soar to higher risk levels? IMHO….I feel rates can and will go up (even in a deflationary enviroment) to support the debt. Higher risk…higher rates…..that is an historic standby….
I don’t think it is likely that government bond rates would go up in a deflationary environment. If we had 2% deflation, the real return on a 3.7% 10 year treasury would be 5.7%, most likely with huge capital gains in addition. Anyone think you will get that in stocks with prices falling and profits reeling?
I know it sounds counterintuitive, but if the economy relapses, bonds are a great buy, even at the lowest rates in 40 years.
Great research. However, I do treat any such research with the appropriate level of skepticism whenever the “Guarantee” word is thrown out.
Death is the “Only” certain thing in this life. Most everything else is oppinion.
agree with ken; let’s forget for a moment whether consumer prices and private economic activity will go up (inflation scenario) or down (deflation); the pricing of treasury debt is another matter; the treasury is no different than any other issuer when it goes to the world debt markets; it presents a range of risks (the days of saying that treasury debt is riskless are over) and opportunities; i can’t see how future pricing long term treasury debt given our existing public debt levels, together with projected debt incurrence over the next 10 years, together with unfunded liabilities, will not require higher yields…this is an investor talking, not an economist.
Britain exited World War II with a debt-to-GDP ratio of 245%. There are other historical precedences for such a conundrum. What there is no precedence for is a certain sovereign debt level or percentage where treasuries implode.
i am not saying implode, just reversing the slope of the 20 year chart for interest rates on the 30 year treasury. jeepers, the chinese are trying to rally the world behind a new reserve currency based on IMF special drawing rights and india is buying gold….
Totally agree with Ken & Rob identifying a KEY component of ANY discussion with regards to the topic of INFLATION/DEFLATION…IF by that you mean ultimately the RELATIVE value of the USD when compared with various world currencies…and also Commodities, chief among them of course, GOLD.
I LOVE wasting my time reading these ECONOMIC forecasts made by “experts” who KNOWINGLY leave GAPING holes in their forecasts, so that they can, when convenient, add the missing component(s) later when it suits them.
Had enough of this CRAP to last a lifetime.
Please….ANYBODY out there in the business of making an economic forecast….give us your best shot at a COMPREHENSIVE forecast….no hemming and hawing…just lay it out there.
We may be dim witted out here….but we are beginning to catch on.
Honest…we are.
Philip has it right IMHO. As the excessive debt burdens on all economies starts taking hold, money as usual will flee to the safest place which will be UST. Rates will not need to go up much if any in those circumstances , and still it will be 2008 all over again. Bonds were the best place to be in 2008. Really not that long ago for everyone to be so easily dismissing the scenario, which is where we are headed. All the Obama posse has done is buy some time to put off the inevitable.