The Big Flip
For more than three decades, Hoisington Investment Management Co. was one of the biggest believers in US government bonds. The Austin-based firm built a reputation - and a following - by correctly calling that interest rates would keep falling and bond prices would rise.
Not anymore.
Van R. Hoisington and Lacy Hunt, the firm's top two people, just told their clients that the 30-year run is over. In their latest quarterly report, they said the "broader structural backdrop" has changed. That is a polite way of saying they now expect long-term Treasury yields to go up, which means bond prices will fall.
And they are putting real money behind that view.
The firm's main bond fund had a duration of 20.88 years at the end of last September. Duration is a fancy word for how sensitive a bond fund is to interest rate changes. The higher the number, the more the fund's value swings when rates move.
By the end of March, that number had dropped to 4.7 years. By June 30, it was under one year. By comparison, the Bloomberg US Aggregate Bond Index, which serves as the fund's benchmark, has a duration near six years.
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Jeffrey Gundlach, the CEO of DoubleLine Capital LLP and a well-known bond investor, summed it up neatly: "Even Lacy Hunt has turned bearish, to his credit."
Why the Change of Heart?
The firm laid out two big reasons for its reversal.
First, the US government is running much larger budget deficits than it used to. That means the Treasury needs to borrow more money, which puts upward pressure on yields. Second, overall demand for capital is climbing across the economy, which also pushes rates higher.
But the biggest factor may be the sheer size of US government debt. As the pile keeps growing, the firm says investors are starting to "increasingly demand a higher risk premium on Treasury securities." In plain English, people who lend money to the government want to be paid more for taking on that risk.
Hoisington and Hunt now expect long-term inflation to settle into a range of 3.5% to 4.5%. They also warn there is "a significant risk of episodes of inflation above 5%." For context, the yield on the 30-year US Treasury bond hit about 5.2% in May of this year - the highest since 2007 - as oil prices climbed. It was sitting near 5.12% just last Thursday.
Recent volatility in the bond market stems from the US military strike on Iran in late February, sparking a jump in oil prices that raised inflation fears and expectations. Bond yields rose as market expectations shifted from rate cuts to potential hikes by the Federal Reserve. This environment has been punishing for long-duration funds, and Hoisington's own performance reflects the pain - its fund lost an average of 8.7% annually over the past five years.
What This Means for Your Portfolio
Here is the uncomfortable part. Hoisington's fund has an average annual return of 5.38% since it started. But over the past five years, it has lost an average of 8.7% a year. That is a brutal stretch for a fund that once managed about $5 billion in 2020 and now has less than $2 billion.
The firm's own numbers tell the story. When rates fall, bond prices rise and this fund shines. When rates rise, the opposite happens.
Hoisington and Hunt now say the interest-rate environment will be less stable than the period from 1990 to 2020. They believe "the long-run equilibrium range is migrating" higher.
The bottom line: A firm that was right about bonds for decades just admitted the game has changed. Whether you own bonds directly or through a fund, the same forces that flipped Hoisington's view - bigger deficits, more debt, and higher inflation - are affecting every corner of the bond market. It is worth paying attention when a bull that old decides to head the other way.
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